<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JULY 30, 1996
REGISTRATION NO: 333-4655
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------------------------
AMENDMENT NO. 2
TO
FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
GLOBAL ONE
DISTRIBUTION & MERCHANDISING INC.
(Exact name of registrant as specified in its charter)
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<S> <C> <C>
DELAWARE 2741 95-4578632
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification Number)
</TABLE>
5548 LINDBERGH LANE
BELL, CALIFORNIA 90201-6410
(213) 980-4300
(Address, including ZIP code, and telephone number,
including area code, of registrant's principal executive offices)
--------------------------
JOSEPH C. ANGARD
CHAIRMAN AND CHIEF EXECUTIVE OFFICER
GLOBAL ONE DISTRIBUTION & MERCHANDISING INC.
5548 LINDBERGH LANE
BELL, CALIFORNIA 90201-6410
(213) 980-4300
(Name, address, including ZIP code, and telephone number,
including area code, of agent for service)
--------------------------
COPIES TO:
<TABLE>
<S> <C>
T. Hale Boggs, Esq. Thomas R. King, Esq.
Manatt, Phelps & Phillips, LLP Fredrikson & Byron, P.A.
11355 West Olympic Boulevard 1100 International Centre
Los Angeles, California 90064 900 Second Avenue South
Minneapolis, Minnesota 55402-4140
</TABLE>
--------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE OF THE SECURITIES TO THE
PUBLIC: UPON CONSUMMATION OF THE KRSI MERGER, AS DESCRIBED IN THIS REGISTRATION
STATEMENT.
--------------------------
If the securities being registered on this Form are being offered in
connection with the formation of a holding company and there is compliance with
General Instruction G, check the following box. / /
--------------------------
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
PROPOSED MAXIMUM
PROPOSED MAXIMUM AGGREGATE
TITLE OF SECURITIES AMOUNT TO BE OFFERING PRICE OFFERING AMOUNT OF
BEING REGISTERED REGISTERED(1) PER SHARE (2) PRICE (1)(2) REGISTRATION FEE
<S> <C> <C> <C> <C>
Common Stock, par value $.01 per
share............................ 2,645,756 shares $2.00 $5,291,512 $1,824.66
</TABLE>
(1) Represents the approximate maximum number of shares issuable upon the KRSI
Merger as described in the Registration Statement, based upon (i) the
anticipated maximum number of outstanding shares of Kelly Russell Studios,
Inc. Common Stock at the KRSI Merger's Effective Time, and (ii) the
conversion ratio of one share of Global One Distribution & Merchandising
Inc. Common Stock issued for every two shares of Kelly Russell Studios, Inc.
Common Stock.
(2) Estimated solely for the purpose of determining the registration fee
pursuant to Rules 457(c) and 457(f)(1) and based on the average of the high
and low sales prices of the Kelly Russell Studios, Inc. Common Stock quoted
on the Nasdaq SmallCap Market on May 21, 1996, a date within five (5)
business days of the date on which this Registration Statement was initially
filed.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
GLOBAL ONE DISTRIBUTION & MERCHANDISING INC.
CROSS REFERENCE SHEET SHOWING LOCATION IN PROSPECTUS OF
INFORMATION REQUIRED BY ITEMS OF FORM S-4
<TABLE>
<CAPTION>
FORM S-4 ITEM LOCATION IN PROSPECTUS
- ---------------------------------------- -------------------------------------------
<C> <S> <C>
A. INFORMATION ABOUT THE TRANSACTION
1. Forepart of the Registration
Statement and Outside Front Cover
Page of Prospectus................ Cover Page of Registration Statement; This
Cross Reference Sheet; Outside Front Cover
Page of Proxy Statement/Prospectus
2. Inside Front and Outside Back Cover
Pages of Prospectus............... Inside Front and Outside Back Cover Pages
of Proxy Statement/Prospectus; Available
Information; Table of Contents
3. Risk Factors, Ratio of Earnings to
Fixed Charges and other
information....................... Proxy Statement/Prospectus Cover Page; Sum-
mary of Proxy Statement/Prospectus; Risk
Factors
4. Terms of the Transaction........... Proxy Statement/Prospectus Cover Page;
Proxy Statement/Prospectus Summary; The
KRSI Merger; Comparison of the Rights of
Holders of Global One Common Stock and
Kelly Russell Common Stock
5. Pro Forma Financial Information.... Pro Forma Condensed Consolidated Financial
Statements
6. Material Contacts with the Company
being Acquired.................... The KRSI Merger
7. Additional Information Required for
Reoffering by Persons and Parties
Deemed to be Underwriters......... Not applicable
8. Interests of Named Experts and
Counsel........................... Not applicable
9. Disclosure of Commission Position
on Indemnification for Securities
Act Liabilities................... Commission's Position on Indemnification
for Securities Act Liabilities
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
FORM S-4 ITEM LOCATION IN PROSPECTUS
- ---------------------------------------- -------------------------------------------
<C> <S> <C>
B. INFORMATION ABOUT THE REGISTRANT
10. Information With Respect to S-3
Registrants....................... Not applicable
11. Incorporation of Certain
Information by Reference.......... Not applicable
12. Information with Respect to S-2 or
S-3 Registrants................... Not applicable
13. Incorporation of Certain
Information by Reference.......... Not applicable
14. Information with Respect to
Registrants Other Than S-2 or S-3
Registrants....................... Market Price of and Dividends on Global One
Common Stock and Kelly Russell Common
Stock; Summary Consolidated Financial Data
OSP Publishing Inc.; Management's Discus-
sion and Analysis of Financial Condition
and Results of Operations of OSP; Business
of Global One; Business of the Company;
Management of Global One; Financial
Statements of OSP Publishing, Inc.
C. INFORMATION ABOUT THE COMPANY BEING ACQUIRED
15. Information with Respect to S-3
Companies......................... Not applicable
16. Information with Respect to S-2 or
S-3 Companies..................... Not applicable
17. Information with Respect to
Companies Other Than S-2 or S-3
Companies......................... Summary Selected Financial Data, Kelly Rus-
sell Studios, Inc., Kelly Russell Studios,
Inc. Management's Discussion and Analysis
of Financial Condition and Results of
Operations; Business of Kelly Russell
Studios, Inc.; Market Price of and
Dividends on Global One Common Stock and
Kelly Russell Common Stock; Financial
Statements of Kelly Russell Studios, Inc.
D. VOTING AND MANAGEMENT INFORMATION
18. Information if Proxies, Consents or
Authorizations are to be
Solicited......................... Proxy Statement/Prospectus Cover Page; Sum-
mary of Proxy Statement/Prospectus;
General Information Regarding the Meeting;
The KRSI Merger; Business of Kelly Russell
Studios, Inc. -- Principal Shareholders
and Management of Kelly Russell;
Management of Global One
19. Information if Proxies, Consents or
Authorizations are Not to be
Solicited in an Exchange Offer.... Not applicable
</TABLE>
<PAGE>
[KELLY RUSSELL LETTERHEAD]
, 1996
Dear Kelly Russell Studios, Inc. Shareholder:
I am pleased to invite you to attend the Special Meeting of Shareholders of
Kelly Russell Studios, Inc., which will be held on , 1996, at
a.m., local time, at , , Minnesota. At
the meeting you will be asked to consider and vote upon a Final Amended and
Restated Agreement and Plan of Reorganization (the "Merger Agreement") by and
among Kelly Russell Studios, Inc. ("Kelly Russell"), Global One Distribution &
Merchandising Inc. ("Global One"), OSP Publishing, Inc. ("OSP"), OSP's
subsidiary, The Button Exchange, Ltd. ("BEx"), OSP's shareholders, Joseph C.
Angard and Michael A. Malm (the "OSP Shareholders"), and the wholly owned
subsidiaries of Global One (the "Global One Subsidiaries"). Pursuant to the
Merger Agreement, Kelly Russell will be merged (the "KRSI Merger") with and into
KRSI Acquisition Corp. ("KRSI Acquisition") which is a wholly owned subsidiary
of Global One. Immediately prior to the KRSI Merger, OSP and BEx will be
reorganized as subsidiaries of Global One (the "Reorganization"). In connection
with the transactions contemplated by the Merger Agreement, Global One has
received subscriptions to purchase $6,756,351 (4,504,234 shares) of its common
stock, $0.01 par value per share (the "Global One Common Stock") in a private
placement (the "Private Placement"). The KRSI Merger, the Reorganization and the
Private Placement, the closing of each of which is conditioned upon the closing
of the others, are referred to herein as the "Transactions." If the Transactions
are consummated, KRSI Acquisition will change its name to and operate its
business as "Kelly Russell Studios, Inc." Kelly Russell shareholders will
receive one share of Global One Common Stock in exchange for each two shares of
Kelly Russell Common Stock held at the time of the KRSI Merger. Any Kelly
Russell shareholder entitled to receive a fractional share will receive one
whole share of Global One Common Stock in lieu of such fractional share. Options
and warrants to purchase Kelly Russell Common Stock will become options and
warrants to purchase Global One Common Stock on substantially the same terms and
subject to the same conditions, except that such options and warrants shall be
adjusted as to number and exercise price. See "The KRSI Merger, the
Reorganization and the Private Placement -- Treatment of Kelly Russell Options
and Warrants."
The attached Proxy Statement/Prospectus is intended to provide you with the
information that will enable you to make an informed decision regarding your
vote on the proposed KRSI Merger. It also serves as a Prospectus for Global One,
describing your investment in Global One if the KRSI Merger is approved and your
shares of Kelly Russell Common Stock are exchanged for shares of Global One
Common Stock. A copy of the Merger Agreement is attached to the Proxy
Statement/Prospectus as Appendix A. I urge you to carefully read this
information before voting on the proposed KRSI Merger.
THE BOARD OF DIRECTORS OF KELLY RUSSELL BELIEVES THAT THE PROPOSED
TRANSACTION IS FAIR AND IN THE BEST INTERESTS OF KELLY RUSSELL AND ITS
SHAREHOLDERS AND UNANIMOUSLY RECOMMENDS APPROVAL OF THE MERGER AGREEMENT. The
Board believes that the KRSI Merger will, among other things, give Kelly Russell
shareholders the opportunity to continue their equity participation on a
tax-free basis in a larger, more diversified enterprise which has a more
extensive distribution network.
The Board of Directors of Kelly Russell have retained the investment banking
firm The Equisource Group to advise it with respect to the consideration to be
received in the KRSI Merger. The Equisource Group has advised the Board of
Directors that, in its opinion, the consideration to be received by the Kelly
Russell shareholders pursuant to the Merger Agreement is fair from a financial
point of view. A copy of the opinion is attached to the Proxy
Statement/Prospectus as Appendix B.
<PAGE>
The Merger Agreement must be approved by the holders of a majority of the
outstanding shares of Kelly Russell Common Stock. Your vote on this matter is
very important. We urge you to carefully review the enclosed material and to
return your proxy promptly.
WHETHER OR NOT YOU PLAN TO ATTEND THE MEETING, PLEASE SIGN AND PROMPTLY
RETURN YOUR PROXY CARD IN THE ENCLOSED POSTAGE-PAID ENVELOPE. IF YOU ATTEND THE
MEETING, YOU MAY VOTE IN PERSON IF YOU WISH, EVEN THOUGH YOU HAVE PREVIOUSLY
RETURNED YOUR PROXY.
Sincerely,
George J. Vrabeck
CHIEF EXECUTIVE OFFICER
<PAGE>
KELLY RUSSELL STUDIOS, INC.
2905 NORTHWEST BOULEVARD, #220
PLYMOUTH, MINNESOTA 55441
------------------------
NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
TO BE HELD , 1996
------------------------
To the Shareholders of Kelly Russell Studios, Inc.:
A Special Meeting of the Shareholders of Kelly Russell Studios, Inc. ("Kelly
Russell") will be held at ,
, Minnesota, on , 1996, at a.m., local
time, to:
1. Consider and act upon a proposal to approve a Final Amended and Restated
Agreement and Plan of Reorganization (the "Merger Agreement"), a copy of
which is included as Appendix A to the Proxy Statement/Prospectus
accompanying this Notice. Pursuant to the Merger Agreement: (a) Kelly
Russell will be merged (the "KRSI Merger") with and into KRSI Acquisition
Corp., a wholly owned subsidiary of Global One Distribution &
Merchandising Inc. ("Global One"), which will change its name to "Kelly
Russell Studios, Inc." and (b) holders of Kelly Russell common stock, par
value $.01 per share ("Kelly Russell Common Stock"), will receive one
share of Global One common stock, par value $.01 per share ("Global One
Common Stock"), for each two shares of Kelly Russell Common Stock held at
the time of the KRSI Merger.
2. Transact such other business as may properly come before this Special
Meeting or any adjournment thereof.
Only shareholders of record as shown on the books of Kelly Russell at the
close of business on July 19, 1996 are entitled to notice of and to vote at the
Meeting or any adjournments thereof.
Record and beneficial owners of shares of Kelly Russell Common Stock are
entitled to dissent from the KRSI Merger and to receive the payment determined
in a judicial proceeding if they comply with certain procedures specified in the
Minnesota Business Corporation Act and described in the accompanying Proxy
Statement/Prospectus. A copy of Sections 302A.471 and 302A.473 of said Act
relating to dissenters' rights is attached to the Proxy Statement/Prospectus as
Appendix C.
BY ORDER OF THE BOARD OF DIRECTORS
SECRETARY
, 1996
WHETHER OR NOT YOU PLAN TO ATTEND THE SPECIAL MEETING, PLEASE
COMPLETE, SIGN AND DATE THE ENCLOSED PROXY CARD AND MAIL IT
PROMPTLY IN THE ENCLOSED PROXY RETURN ENVELOPE, WHICH REQUIRES
NO POSTAGE IF MAILED IN THE UNITED STATES
SHAREHOLDERS SHOULD NOT SEND ANY STOCK
CERTIFICATES WITH THE PROXY CARD
<PAGE>
PROXY STATEMENT/PROSPECTUS
<TABLE>
<S> <C>
Kelly Russell Studios, Inc. Global One Distribution & Merchandising Inc.
2095 Northwest Boulevard, #220 5548 Lindbergh Lane
Plymouth, Minnesota 55441 Bell, California 90201-6410
Telephone: (612) 553-9992 Telephone: (213) 980-4300
Proxy Statement for Prospectus for shares
Meeting of Shareholders issuable in KRSI Merger
to be held on , 1996
</TABLE>
Global One Distribution & Merchandising Inc., a Delaware corporation
("Global One"), has filed this Prospectus of Global One and Proxy Statement of
Kelly Russell Studios, Inc. ("Kelly Russell") with the Securities and Exchange
Commission (the "Commission") as part of a Registration Statement on Form S-4
(the "Registration Statement"), pursuant to the Securities Act of 1933, as
amended (the "Securities Act"). The Registration Statement registers up to
2,645,756 shares of common stock, $.01 par value, of Global One ("Global One
Common Stock"), issuable to shareholders of Kelly Russell upon consummation of
the merger ("the KRSI Merger") of Kelly Russell with and into KRSI Acquisition
Corp. ("KRSI Acquisition"), a wholly owned subsidiary of Global One, pursuant to
the terms of the Final Amended and Restated Agreement and Plan of Reorganization
(the "Merger Agreement") between and among Kelly Russell, Global One, OSP
Publishing, Inc. ("OSP"), OSP's subsidiary, The Button Exchange, Inc. ("BEx"),
the current shareholders of OSP, Joseph C. Angard and Michael A. Malm (the "OSP
Shareholders"), and the wholly owned subsidiaries of Global One (the "Global One
Subsidiaries"). Immediately prior to the KRSI Merger, OSP and BEx will
reorganize by merger with and into OSP Acquisition Corp. and BEx Acquisition
Corp., respectively, (the "Reorganization"). In connection with the transactions
contemplated by the Merger Agreement, Global One has received subscriptions to
purchase $6,756,351 (4,504,234 shares) of Global One Common Stock in a private
placement (the "Private Placement"). The subscription period for the Private
Placement ended on May 28, 1996. Subscribers have committed to purchase the
Private Placement shares subject only to the closing of the KRSI Merger. The
Private Placement will be consummated concurrently with the Reorganization and
the KRSI Merger at a single closing (the "Closing") to take place as soon as
practicable following the approval of the KRSI Merger by the requisite vote of
the Kelly Russell shareholders at the Meeting. A portion of the proceeds of the
Private Placement will be used to pay an accrued cash dividend of $1,750,000 to
the OSP Shareholders and an additional dividend of approximately $600,000 to
permit the OSP Shareholders to pay their respective tax liabilities incurred as
a result of OSP's operating results during 1995 since, prior to the Closing, OSP
has been taxed as an S Corporation. The KRSI Merger, the Reorganization and the
Private Placement, the closing of each of which is conditioned upon the closing
of the others, are referred to herein as the "Transactions."
If the Transactions are consummated, KRSI Acquisition will change its name
to "Kelly Russell Studios, Inc." and will conduct its business under such name
as a wholly owned subsidiary of Global One. Kelly Russell's shareholders will be
entitled to receive one share of Global One Common Stock for each two shares of
Kelly Russell Common Stock held at the time of the KRSI Merger. Following the
KRSI Merger, assuming no Kelly Russell shareholders dissent from the KRSI Merger
and without giving effect to the possible exercise of the options and warrants
to purchase Global One Common Stock which will be outstanding following the KRSI
Merger, the Kelly Russell shareholders, OSP Shareholders and Private Placement
investors will own 15.7%, 49.6% and 34.7%, respectively, of the outstanding
shares of Global One Common Stock.
This Proxy Statement/Prospectus is being furnished to the shareholders of
Kelly Russell in connection with the solicitation of proxies by the Board of
Directors of Kelly Russell for use at the Special Meeting of Shareholders of
Kelly Russell to be held on , 1996 (the "Meeting"). At the Meeting,
Kelly Russell Shareholders will be asked to (i) consider and vote upon a
proposal to approve the Merger Agreement; and (ii) transact such other business
as may properly come before the Meeting. Kelly Russell shareholders will have a
right to dissent from the KRSI Merger and receive the fair value of their shares
if they comply with certain procedures described herein. See "The KRSI Merger,
the Reorganization and the Private Placement -- Rights of Dissenting
Shareholders."
This Proxy Statement/Prospectus also serves as Global One's Prospectus under
the Securities Act with respect to the issuance of up to 2,645,756 shares of
Global One Common Stock pursuant to the Merger Agreement more fully described
herein.
This Proxy Statement/Prospectus does not cover any resales of Global One
Common Stock received by Kelly Russell Shareholders upon consummation of the
proposed KRSI Merger pursuant to the Merger Agreement, and no person is
authorized to make any use of this Proxy Statement/Prospectus in connection with
any such resale or in connection with the offer or sale of any other securities.
The consummation of the KRSI Merger is subject to the receipt of the
approval of the shareholders of Kelly Russell, as well as the fulfillment of
certain other conditions, as more fully described in this Proxy
Statement/Prospectus. See "The KRSI Merger, the Reorganization and the Private
Placement -- Conditions to Consummation of the KRSI Merger and the
Reorganization; -- Amendment, Waiver and Termination of the Merger Agreement; --
Regulatory Approvals."
This Proxy Statement/Prospectus is being first mailed or delivered to
shareholders of Kelly Russell on or about , 1996.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROXY STATEMENT/PROSPECTUS. ANY REPRESENTATION
TO THE CONTRARY IS A CRIMINAL OFFENSE.
THE DATE OF THIS PROXY STATEMENT/PROSPECTUS IS , 1996.
<PAGE>
TABLE OF CONTENTS
<TABLE>
<S> <C>
AVAILABLE INFORMATION
SUMMARY................................................................... 1
RISK FACTORS OF GLOBAL ONE DISTRIBUTION & MERCHANDISING INC............... 14
Reliance on License Agreements.......................................... 14
Market Acceptance of Licensed Properties................................ 15
Seasonality and Fluctuations in Operating Results....................... 15
Risk of Continued Operating Losses of Kelly Russell..................... 15
Concentrated Customer Base.............................................. 16
Dependence on Key Personnel............................................. 16
Control by Existing Shareholders........................................ 16
No Assurance of Public Market........................................... 16
Possible Insufficiency of Working Capital............................... 16
Anti-takeover Effect of Undesignated Preferred Stock.................... 17
Material Returns of Unsold Products..................................... 17
GENERAL INFORMATION REGARDING THE MEETING................................. 17
THE KRSI MERGER, THE REORGANIZATION AND THE PRIVATE PLACEMENT............. 19
General................................................................. 19
Effective Time of the KRSI Merger and the Reorganization................ 19
Background of the KRSI Merger and the Reorganization.................... 19
The Private Placement................................................... 22
Kelly Russell Reasons for the KRSI Merger; Recommendation of the Kelly
Russell Board of Directors............................................. 22
The Company's Reasons for The KRSI Merger and the Reorganization........ 22
Operations and Management After the Transactions........................ 23
Kelly Russell's Financial Advisors...................................... 24
Vote Required to Approve the KRSI Merger................................ 27
Conversion of Kelly Russell Common Stock in the KRSI Merger............. 27
Treatment of Kelly Russell Options and Warrants......................... 27
Conversion of OSP Common Stock and Warrants in the Reorganization....... 28
Treatment of Common Stock, Options and Warrants of Global One following
the KRSI Merger........................................................ 28
Exchange of Certificates in the KRSI Merger............................. 28
Conduct of Business Pending the KRSI Merger and the Reorganization...... 29
Conditions to Consummation of the KRSI Merger and the Reorganization.... 29
Amendment, Waiver and Termination of the Merger Agreement............... 30
Expenses and Fees....................................................... 31
Representation and Warranties........................................... 31
Interests of Certain Persons in the KRSI Merger......................... 32
Limitation on Negotiations.............................................. 33
Resale of Global One Common Stock....................................... 33
Accounting Treatment of the KRSI Merger................................. 34
Certain Federal Income Tax Consequences................................. 34
Indemnification......................................................... 35
Regulatory Approvals.................................................... 35
Rights of Dissenting Shareholders....................................... 35
MARKET PRICE OF AND DIVIDENDS ON OSP COMMON STOCK, GLOBAL ONE COMMON STOCK
AND KELLY RUSSELL COMMON STOCK........................................... 38
Market Information...................................................... 38
</TABLE>
i
<PAGE>
<TABLE>
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Shareholders............................................................ 39
Dividends............................................................... 39
COMPARISON OF THE RIGHTS OF HOLDERS OF GLOBAL ONE COMMON STOCK AND KELLY
RUSSELL COMMON STOCK..................................................... 40
Global One.............................................................. 40
Kelly Russell........................................................... 41
Comparison of Kelly Russell Common Stock and Global One Common Stock.... 41
Meetings of Shareholders................................................ 42
Action without Meetings of Shareholders................................. 42
Dividends and Repurchases of Stock...................................... 42
Inspection Rights....................................................... 42
Amendments to Charter................................................... 43
Amendment of By-laws.................................................... 43
Preemptive Rights....................................................... 43
Directors............................................................... 43
Personal Liability of Directors......................................... 44
Indemnification......................................................... 44
Control Share Acquisitions.............................................. 45
Business Combinations................................................... 45
Rights of Dissenting Shareholders....................................... 45
UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS............... 46
S CORPORATION DISTRIBUTIONS............................................... 53
CAPITALIZATION............................................................ 53
SELECTED CONSOLIDATED FINANCIAL DATA OSP PUBLISHING, INC.
AND SUBSIDIARIES......................................................... 55
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS OF THE COMPANY................................................ 56
General................................................................. 56
Results of Operations................................................... 57
Discontinued Operations................................................. 59
Liquidity and Capital Resources......................................... 64
Effects of Inflation.................................................... 66
Seasonality............................................................. 66
BUSINESS OF GLOBAL ONE.................................................... 68
BUSINESS OF THE COMPANY................................................... 68
General................................................................. 68
Business Strategy....................................................... 69
Overview of the Licensed Merchandise Industry........................... 69
Competition............................................................. 70
Products and Operating Subsidiaries..................................... 70
Licensing............................................................... 71
Design and Development.................................................. 74
Manufacturing........................................................... 74
Sales and Marketing..................................................... 74
Returns Policy.......................................................... 76
Backlog................................................................. 76
Government Regulation; Tariffs and Duties............................... 76
Employees............................................................... 76
Properties.............................................................. 76
</TABLE>
ii
<PAGE>
<TABLE>
<S> <C>
Legal Proceedings....................................................... 76
Trademarks.............................................................. 76
MANAGEMENT OF GLOBAL ONE.................................................. 77
Directors and Executive Officers........................................ 77
Compensation of Board of Directors...................................... 78
Executive Compensation.................................................. 79
Employment Agreements................................................... 79
Certain Relationships and Related Transactions.......................... 80
Security Ownership of Certain Beneficial Owners and Management of Global
One (Pro Forma)........................................................ 81
KELLY RUSSELL STUDIOS, INC. SELECTED FINANCIAL DATA....................... 83
KELLY RUSSELL STUDIOS, INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS............................ 84
General................................................................. 84
Results of Operations................................................... 85
Seasonality............................................................. 89
Liquidity and Capital Resources......................................... 89
BUSINESS OF KELLY RUSSELL STUDIOS, INC.................................... 91
Products................................................................ 92
Marketing and Distribution.............................................. 94
License Agreements and Trademarks....................................... 94
Product Supply and Production........................................... 95
Competition............................................................. 96
Employees............................................................... 96
Environment............................................................. 96
Seasonality............................................................. 96
Description of Property................................................. 96
Legal Proceedings....................................................... 97
PRINCIPAL SHAREHOLDERS AND MANAGEMENT OF KELLY RUSSELL.................... 97
Certain Relationships and Related Transactions.......................... 98
LEGAL MATTERS............................................................. 98
EXPERTS................................................................... 98
INDEX TO FINANCIAL STATEMENTS............................................. F-1
PART II -- INFORMATION NOT REQUIRED IN PROSPECTUS......................... II-1
SIGNATURES................................................................ S-1
</TABLE>
iii
<PAGE>
AVAILABLE INFORMATION
This Proxy Statement/Prospectus is a prospectus of Global One delivered in
compliance with the Securities Act. Global One has filed a Registration
Statement on Form S-4 under the Act with the Commission with respect to the
shares of Global One Common Stock to be issued in connection with the KRSI
Merger. As permitted by the rules and regulations of the Commission, this Proxy
Statement/ Prospectus omits certain information contained in the Registration
Statement on file with the Commission. For further information pertaining to the
securities offered hereby, reference is made to the Registration Statement,
including the exhibits filed as a part thereof.
Kelly Russell is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and, in accordance
therewith, files reports, proxy and information statements, and other
information with the Commission. The Registration Statement filed by Global One,
as well as reports, proxy and information statements, and other information
filed by Kelly Russell pursuant to the Exchange Act, can be inspected and copied
at the public reference facilities maintained by the Commission at Room 1024,
Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549, and are also
available for inspection and copying at the regional offices of the Commission
located in Chicago, (Suite 1400, Northwestern Atrium Center, 500 West Madison
Street, Chicago, Illinois 60661) and New York (7 World Trade Center, Suite 1300,
New York, New York 10048). Copies of such documents can also be obtained at
prescribed rates by writing to the Public Reference Section of the Commission at
450 Fifth Street, Room 1024, N.W., Washington, D.C. 20549 at prescribed rates.
Global One will furnish its shareholders with annual reports containing
audited financial statements and an opinion thereon expressed by independent
public accountants and with quarterly reports for the first three quarters of
each fiscal year containing unaudited summary financial information.
<PAGE>
SUMMARY
THE FOLLOWING IS A BRIEF SUMMARY OF CERTAIN INFORMATION CONTAINED ELSEWHERE
IN THIS PROXY STATEMENT/PROSPECTUS AND IN THE DOCUMENTS INCORPORATED HEREIN BY
REFERENCE. CERTAIN CAPITALIZED TERMS USED IN THIS SUMMARY ARE DEFINED ELSEWHERE
IN THIS PROXY STATEMENT/PROSPECTUS. REFERENCE IS MADE TO, AND THIS SUMMARY IS
QUALIFIED IN ITS ENTIRETY BY, THE MORE DETAILED INFORMATION CONTAINED IN THIS
PROXY STATEMENT/PROSPECTUS, THE APPENDICES HERETO, AND THE DOCUMENTS
INCORPORATED IN THIS PROXY STATEMENT/ PROSPECTUS BY REFERENCE. AS USED IN THIS
PROXY STATEMENT/PROSPECTUS, "THE COMPANY" REFERS TO OSP AND ITS SUBSIDIARIES,
STANLEY DESANTIS, INC. ("SDI") AND BEX, ON A CONSOLIDATED BASIS, WHILE "OSP"
REFERS TO OSP PUBLISHING, INC., ON AN UNCONSOLIDATED BASIS, UNLESS THE CONTEXT
INDICATES OTHERWISE.
DESCRIPTION OF THE TRANSACTIONS
The Boards of Directors of Kelly Russell Studios, Inc. ("Kelly Russell") and
OSP Publishing, Inc. (the "Company") have determined that it is in the best
interests of their respective corporations and shareholders to combine the
businesses of the two corporations within a single group of companies and to
concurrently raise additional equity capital for the combined businesses.
To effectuate these transactions, a new Delaware corporation, Global One
Distribution & Merchandising Inc. ("Global One"), has been formed, and Global
One has formed three subsidiary Delaware corporations, KRSI Acquisition Corp.
("KRSI Acquisition"), OSP Acquisition Corp. ("OSP Acquisition") and BEx
Acquisition Corp. ("BEx Acquisition"). (KRSI Acquisition, OSP Acquisition and
BEx Acquisition are referred to herein as the "Global One Subsidiaries"). The
parties have entered into a Final Amended and Restated Agreement and Plan of
Reorganization dated May 28, 1996 effective as of March 27, 1996, between and
among Kelly Russell, Global One, OSP, OSP's subsidiary, The Button Exchange,
Ltd. ("BEx"), OSP's shareholders and the Global One Subsidiaries (the "Merger
Agreement"), pursuant to which OSP will be merged with and into OSP Acquisition
(the "OSP Merger"), BEx will be merged with and into BEx Acquisition (the "BEx
Merger"), and Kelly Russell will be merged with and into KRSI Acquisition (the
"KRSI Merger"). The OSP Merger and the BEx Merger, which will occur immediately
prior to the KRSI Merger, are referred to herein as the "Reorganization."
In connection with the foregoing, Global One has received subscriptions for
4,504,234 shares of its common stock, $0.01 par value ("Global One Common
Stock") in a private placement at $1.50 per share (the "Private Placement"). The
subscription period for the Private Placement ended on May 28, 1996. The gross
proceeds from the Private Placement will be $6,756,351. The KRSI Merger, the
Reorganization and the Private Placement, the closing of each of which is
conditioned on the closing of the others, are referred to herein as the
"Transactions." The Transactions will be consummated at a single closing (the
"Closing") to take place as soon as practicable following the approval of the
KRSI Merger by the requisite vote of the Kelly Russell shareholders at the
Meeting.
A portion of the proceeds of the Private Placement will be used to pay an
accrued cash dividend of $1,750,000 to Joseph C. Angard and Michael A. Malm (the
"OSP Shareholders"). In addition, if and to the extent that OSP's cash flow is
insufficient to make such payment, a portion of the proceeds of the Private
Placement will be used to pay an additional dividend of approximately $600,000
to permit the OSP Shareholders to pay their respective tax liabilities incurred
as a result of OSP's operating results during 1995 since, prior to the Closing,
OSP has been taxed as an S Corporation. Global One will also use $375,000 of the
proceeds of the Private Placement to repay outstanding subordinated debt of the
Company. After deducting expenses of the Transactions of approximately $2.2
million, the approximately $1.8 million balance of the proceeds from the Private
Placement will be used for working capital purposes. See "Unaudited Pro Forma
Condensed Combined Financial Statements."
At the Closing, KRSI Acquisition will change its name to and conduct its
business under the name "Kelly Russell Studios, Inc.," OSP Acquisition will
change its name to "OSP Publishing, Inc.," and
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BEx Acquisition will change its name to "BEx Corp." As a result of the
Transactions, Global One will become a holding company for Kelly Russell, OSP
and BEx. OSP's subsidiary, SDI will continue to operate as a subsidiary of OSP.
Following the closing of the Transactions, there is anticipated to be
outstanding 12,993,509 shares of Global One Common Stock held approximately as
follows:(1)
<TABLE>
<CAPTION>
GROUP AGGREGATE SHARES PERCENTAGE
- -------------------------------------------------------------------------- ---------------- -----------
<S> <C> <C>
OSP Shareholders.......................................................... 6,448,088 49.6%
Former Kelly Russell shareholders......................................... 2,041,187 15.7%
New Investors in the Private Placement.................................... 4,504,234 34.7%
---------------- -----------
Total..................................................................... 12,993,509 100.0%
</TABLE>
In addition, following the closing of the Transactions, there is anticipated
to be outstanding warrants, options and other rights (both vested and unvested)
to acquire 3,143,033 shares of Global One Common Stock, consisting of rights to
acquire 1,285,000 shares to be granted to the officers and directors of Global
One under the 1996 Stock Option Plan, 1,254,063 shares to be held by or granted
to financial advisors and placement agents to Global One or OSP, and 603,970
shares to be held by holders of rights to acquire Kelly Russell Common Stock.
- ------------------------
(1) Assumes that no Kelly Russell shareholders dissent from the KRSI Merger, no
effect is given to options and warrants to be outstanding after the
Effective Time, and no outstanding options or warrants to acquire shares of
OSP Common Stock or Kelly Russell Common Stock are exercised or canceled
prior to the Effective Time.
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PARTIES TO THE TRANSACTIONS
KELLY RUSSELL................... Kelly Russell is a Minnesota corporation which
was incorporated in 1992.
Kelly Russell creates, markets and distributes
sports and entertainment related art for the
collectible market. Kelly Russell's primary
strategy is to use its collection of original
art to create innovative, affordable products
with an artistic look, quality and
presentation that differentiates them from
other entertainment products, such as posters
and trading cards. Kelly Russell focuses on
products with a wide range of appeal that can
be quickly created, produced and sold through
mass merchants, distributors and specialty
retail stores. Almost all of Kelly Russell's
products are produced and sold under
non-exclusive licenses from major national
sports franchises and their related players'
association. In 1995, Kelly Russell introduced
and expanded its licensing agreements for the
movie, music, and television product line.
Kelly Russell's principal offices and
corporate headquarters are located at 2095
Northwest Blvd., Plymouth, Minnesota 55441,
telephone: (612) 553-9992.
GLOBAL ONE...................... Global One is a corporation formed under
Delaware law to serve as a holding company for
OSP and its subsidiaries, SDI and BEx, and to
acquire Kelly Russell through KRSI Acquisition
in the KRSI Merger. Following the Closing, the
business of Global One will be conducted
through the Global One Subsidiaries and SDI,
each of which conducts a distinct business.
Global One's principal offices and corporate
headquarters will be located at 5548 Lindbergh
Street, Bell, California 90201-6410,
telephone: (213) 980-4300.
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THE COMPANY..................... OSP was formed in 1989. Although the Company
is unable to obtain published financial and
other data with respect to production and
sales volumes of its competitors the majority
of which are private companies, the Company's
management believes, based on their experience
and knowledge of the licensed poster industry,
that OSP is the largest domestic publisher of
licensed posters. With annual sales of
approximately $25 million, OSP accounts for
25% to 33% of a total annual production volume
in the domestic licensed poster business of
between $75 and $100 million. The Company's
management further believes, based on its
knowledge of the licensed poster industry,
that the Company's next largest competitor has
annual sales of approximately $20 million. OSP
develops and markets posters, framed and
unframed wall decor, Wallet Cards and Book
Bites, each of which incorporates primarily
licensed images and characters from motion
pictures, television, animation, music, sports
and popular culture. OSP's subsidiary, SDI,
develops and markets licensed and non-licensed
T-shirts, sweatshirts, hats, boxer shorts and
mugs. OSP's other subsidiary, BEx, develops
and markets licensed and non-licensed buttons,
key rings and stickers.
The Company's principal offices and corporate
headquarters are located at 5548 Lindbergh
Lane, Bell, California 90201-6410, telephone:
(213) 980-4300.
THE GLOBAL ONE SUBSIDIARIES..... The Global One Subsidiaries, KRSI Acquisition,
OSP Acquisition and BEx Acquisition, are
Delaware corporations recently organized by
Global One for the purpose of effecting the
KRSI Merger and the Reorganization. The Global
One Subsidiaries have no material assets and
have not engaged in any activities except in
connection with the Transactions.
KELLY RUSSELL SHAREHOLDERS' MEETING
TIME, DATE, AND PLACE OF
MEETING........................ A special meeting of shareholders of Kelly
Russell will be held on , 1996, at
a.m., local time, at
, ,
Minnesota (the "Meeting").
PURPOSE OF THE MEETING.......... The purpose of the Meeting is to consider and
vote upon a proposal to approve the Final
Amended and Restated Agreement and Plan of
Reorganization dated May 28, 1996 effective as
of March 27, 1996 (the "Merger Agreement"),
attached hereto as Appendix A, providing for,
among other things, the KRSI Merger with KRSI
Acquisition as the surviving corporation. KRSI
Acquisition will change its name to and
conduct its business under the name "Kelly
Russell Studios, Inc." Other terms and
provisions related to the KRSI Merger are set
forth in the Merger Agreement and summarized
in this Proxy Statement/ Prospectus.
RECORD DATE..................... Only holders of record of Kelly Russell Common
Stock at the close of business on July 19,
1996 (the "Record Date"), will be entitled to
notice of and to vote at the Meeting or any
adjournment or adjournments thereof.
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VOTE REQUIRED................... The affirmative vote by the holders of a
majority of the outstanding shares of Kelly
Russell Common Stock is required to approve
the Merger Agreement. As of the record date,
4,082,373 shares of Kelly Russell Common Stock
were outstanding and entitled to vote. Of such
shares, 477,166 shares (approximately 10.7% of
the shares entitled to vote at the Meeting)
are held by directors and executive officers
of Kelly Russell, all of whom have indicated
they plan to vote in favor of approval of the
Merger Agreement.
Global One and KRSI Acquisition have each
already taken such corporate action to approve
the Merger Agreement as is required under
Delaware law. See "The KRSI Merger, the
Reorganization and the Private Placement --
Vote Required to Approve the KRSI Merger."
DISSENTERS' RIGHTS.............. Under Minnesota law, holders of Kelly Russell
Common Stock who give proper notice to Kelly
Russell and do not vote in favor of the KRSI
Merger, have the right to receive in cash the
"fair value" of their Kelly Russell Common
Stock in lieu of Global One Common Stock
pursuant to the KRSI Merger. See "The KRSI
Merger, the Reorganization and the Private
Placement -- Rights of Dissenting
Shareholders."
DESCRIPTION OF THE KRSI MERGER
GENERAL......................... Upon consummation of the KRSI Merger, Kelly
Russell will be merged with and into KRSI
Acquisition, thereby causing the separate
existence of Kelly Russell to cease. Promptly
after the KRSI Merger, KRSI Acquisition will
change its name to and conduct its business
under the name "Kelly Russell Studios, Inc."
Each two shares of Kelly Russell Common Stock
outstanding immediately prior to the KRSI
Merger will be converted into one share (the
"Conversion Ratio") of Global One Common
Stock. The Conversion Ratio is subject to
appropriate adjustment in the event of a stock
split, combination, dividend, or other
distribution of shares of the Global One
Common Stock prior to the Effective Time of
the KRSI Merger. Persons entitled to
fractional shares of Global One Common Stock
upon such conversion shall receive one full
share of Common Stock in lieu thereof. See
"The KRSI Merger, the Reorganization and the
Private Placement."
EFFECTIVE TIME OF THE KRSI
MERGER......................... The KRSI Merger shall become effective upon
the filing of Certificates of Merger with the
Secretary of State of Delaware and Secretary
of State of Minnesota (the "Effective Time"),
which is expected to occur as promptly as
practicable following approval of the Merger
Agreement by the requisite vote of the Kelly
Russell shareholders and the satisfaction or
waiver of the other conditions to the KRSI
Merger. See "The KRSI Merger, the
Reorganization and the Private Placement --
Effective Time of the KRSI Merger and the
Reorganization" and "-- Conditions to
Consummation of the KRSI Merger and the
Reorganization."
BACKGROUND OF THE KRSI MERGER... The terms of the Merger Agreement are the
result of arm's-length negotiations between
representatives of OSP and Kelly Russell. In
September 1995, Kelly Russell initiated
discussions with OSP regarding a possible
business combination. In various meetings
taking place from September 1995 to March
1996, representatives of OSP and Kelly
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Russell continued their respective
investigations of the other's business and
discussions regarding a possible merger. In
March 1996, the Kelly Russell Board of
Directors received a preliminary opinion from
The Equisource Group ("Equisource") to the
effect that the proposed merger is fair to
Kelly Russell shareholders from a financial
point of view and the Board of Directors
authorized management to proceed with the
transaction. On March 27, 1996, OSP and Kelly
Russell executed the initial merger agreement.
On March 27, 1996, Kelly Russell issued a
press release regarding the execution of that
merger agreement. Certain revisions were made
to that merger agreement to reflect the
Reorganization, and a final Merger Agreement
was executed on May 28, 1996.
See "The KRSI Merger, the Reorganization and
the Private Placement -- Kelly Russell's
Reasons for the KRSI Merger; Recommendation of
the Kelly Russell Board of Directors; -- The
Company's Reasons for the KRSI Merger and the
Reorganization; and -- Kelly Russell's
Financial Advisors."
CONDITIONS TO KRSI MERGER....... The respective obligations of Kelly Russell,
the Company, Global One, the Global One
Subsidiaries and the OSP Shareholders to
consummate the KRSI Merger are subject to
satisfaction at or prior to the Effective Time
of a number of conditions, including, but not
limited to: (i) the closing by Global One of
the Private Placement with gross proceeds of
at least $6,000,000; and (ii) the closing of
the Reorganization. See "The KRSI Merger, the
Reorganization and the Private Placement --
Conditions to Consummation of the KRSI Merger
and the Reorganization."
REASONS FOR THE KRSI MERGER..... In reaching its conclusions to approve the
Merger Agreement and to recommend the approval
of the Merger Agreement by the Kelly Russell
shareholders, the Kelly Russell Board of
Directors considered Kelly Russell's inability
to compete effectively with the Company in the
entertainment industry; Kelly Russell's lack
of effective distribution capability; the
competitive disadvantages of Kelly Russell
products; projected losses for 1996 even with
a significant increase in sales; the need for
additional financing; the advantages of
combining the Company's marketing, sales and
licensing expertise with Kelly Russell's
sports licenses and systems expertise; and the
likelihood that without additional financing,
Kelly Russell's ability to continue as a going
concern was uncertain. The Kelly Russell Board
of Directors also considered the opinion of
Equisource stating that the KRSI Merger is
fair from a financial point of view to the
shareholders of Kelly Russell.
THE BOARD OF DIRECTORS OF KELLY RUSSELL HAS
UNANIMOUSLY APPROVED THE KRSI MERGER, AND THE
BOARD RECOMMENDS THAT THE SHAREHOLDERS OF
KELLY RUSSELL VOTE IN FAVOR OF THE PROPOSAL
SUBMITTED FOR CONSIDERATION AT THE MEETING.
See "The KRSI Merger, the Reorganization and
the Private Placement -- Kelly Russell's
Reasons for the Merger; Recommendation of the
Kelly Russell Board of Directors; -- The
Company's Reasons for the KRSI Merger and the
Reorganization; and -- Kelly Russell's
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Financial Advisors." For information on the
interests of certain persons in the KRSI
Merger, see "The KRSI Merger, the
Reorganization and the Private Placement --
Interests of Certain Persons in the KRSI
Merger."
KELLY RUSSELL'S FINANCIAL
ADVISORS....................... Equisource was retained by Kelly Russell to
act as a financial advisor to the Board of
Directors in connection with the KRSI Merger.
Equisource presented its opinion to the Board
of Directors that the consideration to be
received by Kelly Russell shareholders in
connection with the KRSI Merger is fair to
such shareholders from a financial point of
view. The opinion of Equisource, which
contains information as to the assumptions
made, matters considered and the scope and
limitations on the review undertaken, is set
forth as Appendix B to this Proxy
Statement/Prospectus and should be read in its
entirety. See "The KRSI Merger, the
Reorganization and the Private Placement --
Kelly Russell's Financial Advisors."
MARKETS AND MARKET PRICES....... Global One has filed an application to include
the Global One Common Stock on the Nasdaq
SmallCap Market under the symbol "GOGO."
However, there can be no assurance that such
application will be approved or that a market
for Global One Common Stock will exist or
develop upon completion of the KRSI Merger, or
if developed, will be maintained. In the event
Global One's application is not approved, it
is anticipated that the Global One Common
Stock will be quoted for trading on the OTC
Bulletin Board or in the Pink Sheets
maintained by the National Quotation Bureau,
Inc. See "Market Price of and Dividends on OSP
Common Stock, Global One Common Stock and
Kelly Russell Common Stock -- Market
Information."
Under the Merger Agreement, the Conversion
Ratio will not change based upon any change in
the market price of Kelly Russell Common
Stock. Therefore, the consideration received
by Kelly Russell shareholders does not reflect
the trading price of Kelly Russell Common
Stock as of the Effective Time of the KRSI
Merger. See "The KRSI Merger, the
Reorganization and the Private Placement --
Conversion of Kelly Russell Common Stock in
the KRSI Merger."
CERTAIN FEDERAL INCOME TAX
CONSEQUENCES................... Global One has received an opinion of counsel
from Manatt, Phelps & Phillips, LLP, that the
KRSI Merger will be treated as a tax-free
reorganization within the meaning of Sections
368(a)(1)(A) and 368(a)(2)(D) of the Internal
Revenue Code of 1986, as amended (the "Code").
Kelly Russell, Global One and KRSI Acquisition
will each be a "party to the reorganization"
within the meaning of Section 368(b) of the
Code.
In the view of counsel, no gain or loss will
be recognized by the shareholders of Kelly
Russell upon their receipt of Global One
Common Stock in exchange for their Kelly
Russell Common Stock. See "The KRSI Merger,
the Reorganization and the Private Placement
-- Certain Federal Income Tax Consequences."
TERMINATION PROVISIONS.......... The Merger Agreement may be terminated at any
time prior to the Effective Time, either
before or after approval of the Merger
Agreement by the Kelly Russell shareholders by
mutual consent of the parties, by
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either party if the KRSI Merger is not
effected by August 31, 1996, and by either OSP
or Kelly Russell in the event of a breach of
the Merger Agreement or other circumstances.
See "The KRSI Merger, the Reorganization and
the Private Placement -- Amendment, Waiver and
Termination of the Merger Agreement."
In the event the Merger Agreement is
terminated because: (i) the Effective Time has
not occurred on or before August 31, 1996 as a
result of a material breach by Kelly Russell
of the Merger Agreement; or (ii) the Kelly
Russell shareholders fail to approve the KRSI
Merger, Kelly Russell will be obligated to pay
liquidated damages in the amount of $250,000
to the Company. Kelly Russell has delivered
$125,000 to an escrow agent the ("Escrow
Agent") and is obligated to deliver an
additional $125,000 to the Escrow Agent. In
the event the Merger Agreement is terminated
as described above, the escrow agent may be
obligated to deliver the escrow funds to the
Company as liquidated damages for such
termination.
In addition, Kelly Russell, the Company, and
Global One have agreed not to initiate,
solicit or knowingly encourage any proposal
that competes with the transaction
contemplated by the Merger Agreement. However,
the Kelly Russell Board of Directors may,
subject to certain conditions, (i) furnish
information to or enter discussions with any
person that makes an unsolicited proposal to
acquire Kelly Russell; (ii) comply with
Exchange Act requirements; or (iii) withhold
or modify its recommendation to the
shareholders to approve the KRSI Merger, in
order to comply with the Board of Directors'
fiduciary duties to the shareholders. In the
event the Kelly Russell Board of Directors
withholds or modifies its recommendation to
its shareholders, and Kelly Russell enters
into an agreement to consummate a competing
transaction to the Merger Agreement within one
year after such withdrawal or failure, Kelly
Russell shall pay OSP $500,000 in cash,
including the $250,000 held pursuant to its
escrow obligations described above. See "The
KRSI Merger, the Reorganization and the
Private Placement -- Amendment, Waiver and
Termination of the Merger Agreement."
ACCOUNTING TREATMENT............ The KRSI Merger will be accounted for under
the purchase method of accounting and the
Reorganization will be accounted for under the
pooling method of accounting. See "The KRSI
Merger, the Reorganization and the Private
Placement -- Accounting Treatment of the KRSI
Merger."
TREATMENT OF STOCK OPTIONS AND
WARRANTS....................... After the Effective Time, all of the options,
warrants and rights to acquire Kelly Russell
Common Stock as of the Effective Time will
continue to have and be subject to
substantially the same terms and conditions,
except that (i) each such option, warrant and
right will be fully vested and exercisable for
that number of shares of Global One Common
Stock which equals the number of shares of
Kelly Russell Common Stock covered by such
option, warrant and right immediately prior to
the Effective Time divided by two (2) and
rounded up to the nearest whole number; and
(ii) the exercise price per share under each
such option, warrant and right shall equal the
exercise price in effect immediately prior to
the Effective Time multiplied by two (2) and
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rounded to the nearest cent. See "The KRSI
Merger, the Reorganization and the Private
Placement -- Treatment of Kelly Russell
Options and Warrants."
INTEREST OF CERTAIN PERSONS IN
THE KRSI MERGER................ Mr. George Vrabeck, a director, President and
Chief Executive Officer of Kelly Russell, has
entered into an employment agreement with
Global One, providing that upon consummation
of the Transactions, Mr. Vrabeck will serve as
an Executive Vice President for a three (3)
year term at an initial base annual salary of
$200,000, plus bonuses and other benefits,
including a grant of options to acquire up to
300,000 shares of Global One Common Stock at
$1.50 per share. Mr. Vrabeck will retain his
current options to purchase up to 200,000
shares of Kelly Russell Common Stock which at
the Effective Time shall be converted into
options to purchase 100,000 shares of Global
One Common Stock. See "The KRSI Merger, the
Reorganization and the Private Placement --
Treatment of Kelly Russell Options and
Warrants" and "-- Interests of Certain Persons
in the KRSI Merger" and "Management of Global
One -- Directors and Executive Officers" and
"-- Employment Agreements."
Mr. Thomas R. King has served as a director of
Kelly Russell since March 1995 and Mr. King is
a shareholder at Fredrikson & Byron, P.A.,
which has served as legal counsel to Kelly
Russell, including matters in connection with
the KRSI Merger. Immediately after the
Effective Time, Mr. King will be a director of
Global One. See "The KRSI Merger, the
Reorganization and the Private Placement --
Interests of Certain Persons in the KRSI
Merger," and "Management of Global One --
Directors and Executive Officers."
Miller, Johnson & Kuehn, Incorporated has
entered into a Placement Agent Agreement with
Global One. D.B. Johnson, a principal
shareholder of Kelly Russell, is an affiliate
of Miller, Johnson & Kuehn, Incorporated. See
"Business of Kelly Russell Studios, Inc." and
"Principal Shareholders and Management of
Kelly Russell."
Immediately following consummation of the
Transactions, the OSP Shareholders will own
beneficially approximately 50% of Global One's
outstanding stock. In addition, the
consummation of the KRSI Merger is contingent
upon the closing by Global One of the Private
Placement. A portion of the proceeds of the
Private Placement will be used to pay an
accrued cash dividend of $1,750,000 to the OSP
Shareholders and an additional dividend of
approximately $600,000 to permit the OSP
Shareholders to pay their individual tax
liabilities incurred as a result of OSP's
operating results during 1995 since, prior to
the Closing, OSP has been taxed as an S
Corporation.
REGULATORY APPROVAL............. Global One and Kelly Russell are not aware of
any government or regulatory requirements
relating to consummation of the KRSI Merger or
the proposals to be considered at the Meeting
other than compliance with applicable federal
and state securities laws. See "The KRSI
Merger, the Reorganization and the Private
Placement -- Regulatory Approvals."
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DESCRIPTION OF THE REORGANIZATION
GENERAL......................... Pursuant to the Merger Agreement, in
connection with the KRSI Merger, the Company
will be merged with and into OSP Acquisition
and BEx will be merged with and into BEx
Acquisition. Promptly after the Reorganization
and KRSI Merger, OSP Acquisition and BEx
Acquisition will change their respective names
to, and conduct their respective businesses
under, the names "OSP Publishing, Inc." and
"The Button Exchange, Inc." Each share of OSP
Common Stock issued and outstanding at such
time will be converted into the right to
receive the number of shares of Global One
Common Stock equal to the number determined by
dividing the sum of (a) fifty percent (50%) of
the amount of fully diluted Kelly Russell
shares plus (b) the amount of Global One
Common Stock issued in the Private Placement
not in excess of 4,000,000, by the sum of (y)
the number of shares of OSP Common Stock
outstanding immediately prior to the Effective
Time and (z) the number of shares of OSP
Common Stock that would be issued immediately
prior to the Effective Time if all the
outstanding warrants, options and any other
rights to acquire OSP Common Stock were
exercised at such time. Each share of BEx
Common Stock issued and outstanding at the
effective time of the BEx Merger will be
canceled and cease to be outstanding. (This
will result in approximately 3,941.37 shares
of Global One Common Stock being issued for
each share of OSP Common Stock.) See "The KRSI
Merger, the Reorganization and the Private
Placement."
EFFECTIVE TIME OF THE
REORGANIZATION................. The Reorganization will be deemed to occur
immediately prior to the Effective Time of the
KRSI Merger, and will be effective upon the
filing of Certificates of Merger with the
Secretaries of State of the States of
Delaware, California and Michigan. Such filing
are expected to occur as promptly as
practicable following approval of the Merger
Agreement by the requisite vote of the Kelly
Russell shareholders and the satisfaction or
waiver of the conditions to the
Reorganization. See "The KRSI Merger, the
Reorganization and the Private Placement --
Conditions to Consummation of the KRSI Merger
and the Reorganization."
BACKGROUND OF THE
REORGANIZATION................. On March 27, 1996, OSP and Kelly Russell
executed an initial merger agreement.
Subsequent to such date, the parties
reevaluated the planned structure of the
resulting entity and determined that the
optimal corporate structure would be for OSP,
BEx and Kelly Russell to operate as
wholly-owned subsidiaries of a newly-formed
holding company, Global One, and for each of
the corporations to be incorporated in
Delaware. On May 28, 1996, the Merger
Agreement was amended and restated to reflect
the agreement of the parties to merge OSP, BEx
and Kelly Russell into the Global One
Subsidiaries.
DESCRIPTION OF THE PRIVATE PLACEMENT
GENERAL......................... In connection with the KRSI Merger and
Reorganization, Global One has solicited and
received subscriptions for the purchase of
4,504,234 shares of its common stock in a
private placement at $1.50 per share. The
subscription period for the Private Placement
ended on May 28,
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1996. The KRSI Merger, the Reorganization and
the Private Placement are each conditioned on
the closing of the others and will be
consummated at a single closing to take place
as soon as practicable following the approval
of the KRSI Merger by the requisite vote of
the Kelly Russell shareholders at the Meeting.
BACKGROUND OF THE PRIVATE
PLACEMENT...................... In anticipation of the KRSI Merger and
Reorganization, Global One undertook the
Private Placement in order to provide
additional working capital to Global One,
reduce its subordinated debt and to pay an
accrued dividend to the OSP Shareholders. The
Private Placement is expected to provide
Global One with gross proceeds of
approximately $6.8 million, and net proceeds
of approximately $1.8 million after paying the
$1.75 million dividend, repaying $375,000 of
subordinated debt, taking into account the
approximately $2.2 million in costs related to
the Transactions and paying an additional
dividend of approximately $600,000 to permit
the OSP Shareholders to pay certain tax
liabilities incurred as a result of OSP's
operating results during 1995 since, prior to
Closing, OSP has been taxed as an S
Corporation.
</TABLE>
COMPARISON OF RIGHTS OF GLOBAL ONE SHAREHOLDERS AND KELLY RUSSELL SHAREHOLDERS
Global One and Kelly Russell are incorporated under the laws of the States
of Delaware and Minnesota, respectively. The rights of Kelly Russell
shareholders are currently governed by the Restated Articles of Incorporation,
as amended and Bylaws, of Kelly Russell. Upon consummation of the KRSI Merger,
Kelly Russell shareholders will become shareholders of Global One and their
rights as such will be governed by the Certificate of Incorporation and Bylaws
of Global One. See "Comparison of the Rights of Holders of Global One Common
Stock and Kelly Russell Common Stock."
RECENT PRICES OF GLOBAL ONE COMMON STOCK AND KELLY RUSSELL COMMON STOCK
From March 1994 to June 10, 1996, Kelly Russell Common Stock traded on the
Nasdaq SmallCap Market under the symbol "KRSI." Since June 10, 1996, the Kelly
Russell Common Stock has traded on the OTC Bulletin Board. The shares of Global
One Common Stock prior to the Effective Time will not be publicly traded on any
exchange or Nasdaq. Application has been made for inclusion of Global One's
Common Stock issuable to Kelly Russell shareholders on the Nasdaq SmallCap
Market, upon consummation of the KRSI Merger under the symbol "GOGO". In the
event Global One's application is not approved, it is anticipated that the
Global One Common Stock will be quoted for trading on the OTC Bulletin Board or
in the Pink Sheets maintained by the National Quotation Bureau, Inc. See "Risk
Factors of Global One Distribution & Merchandising Inc. -- No Assurance of
Public Market."
On March 26, 1996, the last business day immediately proceeding the public
announcement of the proposed KRSI Merger, the closing sale price for Kelly
Russell Common Stock as reported on the Nasdaq SmallCap Market was $2.44 per
share. The Conversion Ratio will not change based upon any changes in the market
prices of Kelly Russell Common Stock prior to the Effective Time. See "The KRSI
Merger, the Reorganization and the Private Placement -- Conversion of Kelly
Russell Common Stock in the KRSI Merger."
10
<PAGE>
SUMMARY SELECTED CONSOLIDATED FINANCIAL DATA
OSP PUBLISHING, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
THREE MONTHS
ENDED
YEARS ENDED DECEMBER 31, MARCH 31,
----------------------------------------------------- --------------------
1991 1992 1993 1994 1995 1995 1996
--------- --------- --------- --------- --------- --------- ---------
(IN THOUSANDS, EXCEPT PER SHARE DATA) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
Sales.............................................. $ 16,173 $ 17,126 $ 38,108 $ 42,168 $ 38,228 $ 7,421 $ 8,941
Cost of sales...................................... 9,304 9,297 22,335 25,140 21,647 4,092 5,270
--------- --------- --------- --------- --------- --------- ---------
Gross profit....................................... 6,869 7,829 15,773 17,028 16,581 3,329 3,671
Operating expenses................................. 5,770 7,143 13,797 16,636 15,172 3,503 3,805
--------- --------- --------- --------- --------- --------- ---------
Income (loss) from operations...................... 1,099 686 1,976 392 1,409 (174) (134)
Interest expense................................... 562 429 605 685 841 173 267
--------- --------- --------- --------- --------- --------- ---------
Income (loss) from continuing operations........... $ 537 $ 257 $ 1,371 $ (293) $ 568 $ (347) $ (401)
--------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- ---------
PRO FORMA INCOME FROM CONTINUING OPERATIONS DATA (1,
2):
Income (loss) before income taxes, minority
interest and discontinued operations, as
reported.......................................... $ 537 $ 257 $ 1,371 $ (293) $ 568 $ (347) $ (401)
Pro forma provision (benefit) for income taxes
(2)............................................... 255 266 344 (43) 114 (70) (85)
--------- --------- --------- --------- --------- --------- ---------
Pro forma net income (2)........................... $ 282 $ (9) $ 1,027 $ (250) $ 454 $ (277) $ (316)
--------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- ---------
PER SHARE DATA:
Pro forma (loss) income from continuing operations
per share......................................... $ 0.06 $ (0.03) $ (0.04)
--------- --------- ---------
--------- --------- ---------
Weighted average shares outstanding (3)............ 8,037 8,036 8,037
--------- --------- ---------
--------- --------- ---------
</TABLE>
<TABLE>
<CAPTION>
AS OF MARCH
AS OF DECEMBER 31, 31,
----------------------------------------------------- -----------
1991 1992 1993 1994 1995 1996
--------- --------- --------- --------- --------- -----------
(IN THOUSANDS) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
CONSOLIDATED BALANCE SHEET DATA (1):
Working capital (deficiency)...................... $ 2,141 $ 1,587 $ 2,337 $ (197) $ 3,312 $ 3,285
Total assets...................................... 6,439 6,427 13,464 13,841 11,698 13,933
Total debt, including current portion............. 5,219 2,896 5,129 6,724 5,989 7,143
Shareholders' equity (deficiency)................. $ (1,075) $ 266 $ 637 $ (1,408) $ (1,299) $ (1,853)
</TABLE>
- ------------------------------
(1) In December 1994, the Company determined to discontinue its Top Banana
division. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations of the Company -- Discontinued Operations" and
Note 12 of Notes to Consolidated Financial Statements.
(2) The Company has been taxed as an S Corporation for federal and state income
tax purposes since 1989. Pro forma income taxes, pro forma loss from
continuing operations, and pro forma loss from continuing operations per
share reflect the pro forma effect of income taxes as if OSP had been taxed
as a C Corporation for all periods presented. Upon consummation of the
Transactions, Global One will be subject to federal and state income taxes.
See "S Corporation Distributions."
(3) Assumes as outstanding, during each of the periods indicated, 1,393,550
shares of the shares being offered by Global One, which represent the
approximate number of shares deemed to be sold by Global One to fund the
$1,750,000 S Corporation distribution described in "S Corporation
Distributions." See also Note 13 of Notes to Consolidated Financial
Statements.
11
<PAGE>
SUMMARY SELECTED FINANCIAL DATA
KELLY RUSSELL STUDIOS, INC.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEARS ENDED DECEMBER 31, MARCH 31,
----------------------------------------------- --------------------
1992 (1) 1993 1994 1995 1995 1996
--------- ---------- ----------- ----------- --------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net sales............................ $ 187,766 $2,242,685 $ 2,767,196 $ 2,813,999 $ 512,863 $ 778,614
Cost of sales........................ 117,479 1,231,651 4,217,646 2,553,181 277,404 452,738
--------- ---------- ----------- ----------- --------- ---------
Gross profit (loss).................. 70,287 1,011,034 (1,450,450) 260,818 235,459 325,876
Operating expenses................... 221,998 1,196,125 3,734,527 2,133,939 451,950 708,401
--------- ---------- ----------- ----------- --------- ---------
Operating loss....................... (151,711) (185,091) (5,184,977) (1,873,121) (216,491) (382,525)
Other income......................... -- -- 119,395 40,079 -- --
Interest expense..................... (1,690) (53,151) (150,448) (7,218) -- (2,024)
--------- ---------- ----------- ----------- --------- ---------
Loss before income taxes and
extraordinary item.................. (153,401) (238,242) (5,216,030) (1,840,260) (216,491) (384,549)
Extraordinary item................... -- -- -- 296,994 246,697 --
--------- ---------- ----------- ----------- --------- ---------
Net income (loss).................... $(153,401) $ (238,242) $(5,216,030) $(1,543,266) $ 30,206 $(384,549)
--------- ---------- ----------- ----------- --------- ---------
--------- ---------- ----------- ----------- --------- ---------
NET LOSS PER COMMON SHARE:
Loss before extraordinary item....... $ (0.04) $ (0.07) $ (1.79) $ (0.52) $ (0.07) $ (0.09)
Extraordinary item................... -- -- -- 0.08 0.08 --
--------- ---------- ----------- ----------- --------- ---------
Net income (loss) per common share... $ (0.04) $ (0.07) $ (1.79) $ (0.44) $ 0.01 $ (0.09)
--------- ---------- ----------- ----------- --------- ---------
--------- ---------- ----------- ----------- --------- ---------
Weighted average number of common and
common equivalent shares
outstanding......................... 2,054,600 2,054,600 2,900,383 3,540,965 3,286,765 4,082,373
</TABLE>
<TABLE>
<CAPTION>
AT DECEMBER 31,
-----------------------------------------------
1992 1993 1994 1995
--------- ---------- ----------- ----------- AT MARCH 31,
------------
1996
------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Current assets................................ $ 364,809 $1,545,998 $ 1,831,596 $ 1,542,351 $1,119,005
Total assets.................................. 368,911 1,904,096 2,049,312 1,857,285 1,397,329
Current liabilities........................... 431,123 2,192,550 1,703,493 833,840 758,433
Total liabilities............................. 431,123 2,192,550 1,703,493 833,840 758,433
Accumulated deficit........................... (153,401) (391,643) (5,607,673) (7,150,939) (7,535,488)
Shareholders' equity (deficit)................ (62,212) (288,454) 345,819 1,023,445 638,896
</TABLE>
- ------------------------------
(1) Kelly Russell was formed in 1992.
12
<PAGE>
UNAUDITED PRO FORMA SELECTED CONDENSED COMBINED FINANCIAL DATA
The following table sets forth selected unaudited pro forma data regarding
the operating results and financial position of Global One based upon the
historical financial data of OSP and Kelly Russell as if the Transactions had
been consummated at January 1, 1995. The pro forma data set forth below should
be read in conjunction with the unaudited pro forma condensed combined financial
statements included elsewhere herein. See "Unaudited Pro Forma Condensed
Combined Financial Statements."
<TABLE>
<CAPTION>
YEAR ENDED THREE MONTHS ENDED
DECEMBER 31, 1995 MARCH 31, 1996
----------------- -------------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C>
STATEMENT OF OPERATIONS DATA:
Pro Forma Combined:
Net sales.............................................................. $ 41,042 $ 9,720
Gross profit........................................................... 16,842 3,997
Operating expenses..................................................... 17,600 4,602
Operating loss......................................................... (758) (605)
Interest expense....................................................... 848 269
Loss before extraordinary item......................................... (1,732) (987)
PRO FORMA NET LOSS DATA:
Pro forma loss before extraordinary item............................... $ (1,923) $ (835)
Pro forma loss before extraordinary item per share..................... (0.15) (0.06)
Pro forma weighted average shares outstanding.......................... 12,994(1) 12,994(1)
<CAPTION>
MARCH 31, 1996
-------------------
<S> <C> <C>
BALANCE SHEET DATA:
Assets................................................................. $ 21,479
Liabilities............................................................ 16,169
Shareholders' equity................................................... 5,310
</TABLE>
- ------------------------
(1) Assumes the issuance of 2,041,187 shares of Global One Common Stock to
effect the KRSI Merger as well as 4,504,234 shares deemed to be sold in the
Private Placement.
13
<PAGE>
RISK FACTORS OF
GLOBAL ONE DISTRIBUTION & MERCHANDISING INC.
Global One and Kelly Russell recommend that you review this entire Proxy
Statement/Prospectus in detail and that you pay careful attention to the matters
discussed below.
This Proxy Statement/Prospectus contains forward-looking statements within
the meaning of the "safe harbor" provisions of the Private Securities Litigation
Reform Act of 1995. Reference is made in particular to the descriptions of the
Company's plans and objectives for future operations, assumptions underlying
such plans and objectives, potential future circumstances and developments, and
other statements that do not consist of historical or current facts included in,
among other sections, "Summary," "Risk Factors of Global One Distribution &
Merchandising Inc.," "Unaudited Pro Forma Condensed Combined Financial
Statements," "Management's Discussion and Analysis of Financial Condition and
Results of Operations of the Company," "Business of Global One," "Kelly Russell
Studios, Inc. Management's Discussion and Analysis of Financial Condition and
Results of Operations" and "Business of Kelly Russell Studios, Inc." Such
discussion is qualified by the inherent risks and uncertainties surrounding
future expectations generally, and also may materially differ from the Company's
actual future operations involving any one or more of such matters and subject
areas. Factors which could cause such results to differ materially from those
described in the forward-looking statements also include, but are not limited
to, those risk factors set forth below.
RELIANCE ON LICENSE AGREEMENTS
Global One's business will be substantially dependent upon its development
of products that bear the names, likenesses, colors and other identifying marks
of characters and images that are licensed to Global One (or to one of its
subsidiaries). Substantially all of the Company's consolidated net sales in 1995
were attributable to products incorporating some licensed material. The
Company's license agreements generally limit both the products that can be
manufactured and the territory in which they can be marketed. Most of the
Company's major licenses are non-exclusive, and there can be no assurance that
major licensors will not in the future grant competing licenses. Also, licensors
typically retain the right to approve the designs and uses of products
manufactured by the Company. Such approvals are typically in the licensors' sole
discretion and may be time-consuming, as approvals are generally required at
each stage of the design and development process. See "Business of The Company
- -- Design and Development."
The Company's licenses generally are for a period of two years. As a result
of changing consumer preferences, in any given year a particular license may
account for a substantial portion of the Company's consolidated net sales. In
addition, the license agreements typically provide that the licensor may
terminate the license in the event of the licensee's failure to submit a
prototype of a licensed product within a specified time period, failure to
complete manufacturing of a licensed product within a specified time period,
failure to meet marketing or shipping dates specified in a license, failure to
actively continue marketing and distribution of a design or style, default under
any provisions of the license to provide statements of account and/or payments
or any other obligations of the licensee, the bankruptcy or insolvency of the
licensee, a change in control of the licensee without the prior written consent
of the licensor or late payment of license royalties. To date, the Company has
not suffered early termination of any of its major licenses. On many occasions,
however, the Company has not paid royalties to licensors on a timely basis and,
accordingly, certain licenses could be subject to termination. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations of The
Company -- Liquidity and Capital Resources." The non-renewal or termination of
one or more of the Company's major licenses could have a material adverse effect
on the Company. Also, as a result of increased competition for licenses, Global
One may, in the future, be required to pay licensors higher royalties and higher
minimum guaranteed payments in order to obtain attractive properties for the
development of existing and new product lines. See "Business of The Company --
Products and Operating Subsidiaries" and "-- Licensing."
14
<PAGE>
Products created under licenses from Disney Enterprises Inc. ("Disney")
accounted for approximately 22% of the Company's consolidated net sales during
1995. The Company's licenses from Disney, among others, are non-exclusive. The
loss of the Company's licenses with Disney or the grant by Disney of competing
licenses would have a material adverse effect on the Company's operations.
MARKET ACCEPTANCE OF LICENSED PROPERTIES
The successful marketing of Global One's products will generally require
Global One to anticipate and evaluate the popularity of licensed properties,
most of which are media related, before commercial introduction of the property
in which a licensed character appears. As most of the Company's promotional or
trend products are typically marketed successfully only for a limited period of
time, the success of the Company's marketing program has been dependent upon its
ability to continually acquire new, popular promotional licenses and develop
successful products tied to such licenses. For example, the Company recently
obtained licenses relating to Disney's film, "THE HUNCHBACK OF NOTRE DAME" and
Twentieth Century Fox's film, "INDEPENDENCE DAY." Whether such films, and the
licensed merchandise based on such films, are successful, cannot be predicted
with any certainty. There can be no assurance that Global One will be able to
successfully develop new products or be able to secure licenses for additional
characters and images that will achieve a degree of popularity comparable to the
Company's existing licensed material. See "Business of The Company -- Products
and Operating Subsidiaries" and "-- Licensing."
SEASONALITY AND FLUCTUATIONS IN OPERATING RESULTS
It is expected that sales of Global One's promotional products will tend to
be seasonal, due to the seasonality of major film releases. The Company's
consolidated net sales recorded during the second quarter of 1995, as a
percentage of the Company's annual sales in 1995, were 32.9%. Although films
that are anticipated to be major hits are often released in the summer, film
distribution companies frequently release major films in the autumn or during
the holidays. As a result, Global One's operating results may fluctuate
substantially from quarter to quarter, as revenues and results of operations may
be materially affected by the timing of development, introduction and market
acceptance of its products. Product development and marketing costs are often
incurred in periods before any revenues are recognized from the sales of
products. Operating costs have been higher during periods in which such product
development costs are incurred and marketing efforts are commenced. Such
fluctuation in sales typically result in corresponding fluctuations in the
Company's profitability, which is anticipated to similarly affect Global One in
the foreseeable future. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations of The Company -- Seasonality." There can be
no assurance that the fluctuations in the Company's sales and profitability will
not negatively affect the market's perception and valuation of the Common Stock.
RISK OF CONTINUED OPERATING LOSSES OF KELLY RUSSELL
Kelly Russell's sales and marketing strategy has been largely unsuccessful
from its inception as planned growth in sales volume and profitability never
materialized. As a result, Kelly Russell's Board of Directors reorganized Kelly
Russell and has taken restructuring charges reflecting various changes,
including hiring new management, revising Kelly Russell's business plan and
operations, discontinuing sales of certain product lines, eliminating certain
distribution channels and substantially reducing its numbers of employees.
Notwithstanding these efforts, Kelly Russell has never shown a profit since
inception. In their report accompanying Kelly Russell's financial statements
included elsewhere herein, Kelly Russell's independent auditors have indicated
that the losses suffered by Kelly Russell to date and accumulated deficit raise
substantial doubt about Kelly Russell's ability to continue as a going concern.
Global One believes that the acquisition of Kelly Russell presents an
opportunity for Global One to increase immediately the array of products
available to customers of the Company and to enter the sports-related licensed
products business through acquisition of Kelly Russell's existing licenses.
Additionally, Global One believes that it will be well-positioned to more
effectively promote the sale of Kelly Russell's products through Global One's
current distribution channels and that the
15
<PAGE>
combined operations will result in greater diversification opportunities and
enhanced market penetration. However, no assurances can be given that Global One
will be able to operate Kelly Russell profitably following the KRSI Merger.
CONCENTRATED CUSTOMER BASE
The five largest customers of the Company accounted for approximately 30% of
consolidated net sales during 1995. Sales to two of those customers, The
Musicland Group, Inc. ("Musicland") and K-Mart, each accounted for approximately
10% of net sales during 1995. During the first quarter of 1996, the Company's
five largest customers accounted for approximately 42% of consolidated net
sales. Two of those customers, Maurice's and Sears, accounted for 15% and 11% of
consolidated net sales in the first quarter. The Company does not have long-term
contracts with any of its major customers. The termination by one or more of
such customers of its relationship with the Company could have a material
adverse effect upon Global One. See "Business of The Company -- Sales and
Marketing."
DEPENDENCE ON KEY PERSONNEL
Global One's business will be dependent upon the expertise and services of
Joseph C. Angard and Michael A. Malm, its Chairman and Chief Executive Officer
and Chief Operating Officer, respectively. Messrs. Angard and Malm have each
entered into three-year employment agreements with Global One commencing at the
Closing of the Transactions. Under their employment agreements, Messrs. Angard
and Malm will be required to devote substantially all of their business time to
Global One and are precluded from competing with Global One during the term of
the agreements. See "Management of Global One -- Employment Agreements." The
loss of the services of either or both of Messrs. Angard and Malm could have a
material adverse effect upon Global One.
CONTROL BY EXISTING SHAREHOLDERS
Immediately after consummation of the Transactions, the OSP Shareholders
will own beneficially approximately 50% of Global One's outstanding Common Stock
through trusts that will be established by Mr. Angard and Mr. Malm,
respectively. It is anticipated that, prior to the Effective Time of the KRSI
Merger, the trusts will enter into an agreement pursuant to which the trustee of
Mr. Angard's trust will be given a proxy entitling Mr. Angard's trust to vote
all of the shares owned by Mr. Malm's trust. Accordingly, acting in concert, the
OSP Shareholders will, as a practical matter, have the ability to determine the
election of all of Global One's directors and, in general, to determine the
outcome of corporate transactions or other matters submitted for stockholder
approval, without the approval of Global One's other stockholders. These matters
include mergers, consolidations, the sale of all or substantially all of Global
One's assets or a change in control of Global One.
NO ASSURANCE OF PUBLIC MARKET
To date, there has been no trading in the Global One Common Stock. Global
One has filed an application to include the Global One Common Stock on the
Nasdaq SmallCap Market commencing at the Effective Time. Miller, Johnson &
Kuehn, Incorporated ("MJK") has indicated its intention to make a market in the
Global One Common Stock on the Nasdaq SmallCap Market, effective upon approval
of the Global One Common Stock for quotation on the Nasdaq SmallCap Market.
However, there can be no assurance that such application will be approved or
that, following the KRSI Merger, an active trading market for the Global One
Common Stock will develop or be sustained. In addition, if and to the extent
that MJK or another securities firm determines to make a market in the Global
One Common Stock, the market maker would be under no obligation to continue to
make a market and could discontinue such activity at any time.
POSSIBLE INSUFFICIENCY OF WORKING CAPITAL
Global One's business strategy provides for further expansion of its
business for which additional capital may be required. There can be no assurance
that the expansion of the Global One's business will be successfully
implemented. In addition, while the Company has been able to establish a working
capital line of credit and subordinated debt financing, there can be no
assurance that Global One will
16
<PAGE>
be able to maintain such relationships or to establish new financing
arrangements on satisfactory terms. The inability to obtain necessary working
capital could have a material adverse effect on Global One's results of
operations. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations of The Company -- Liquidity and Capital Resources."
ANTI-TAKEOVER EFFECT OF UNDESIGNATED PREFERRED STOCK
Global One's authorized capital consists of 50,000,000 shares of capital
stock, of which 30,000,000 shares are designated as Common Stock and 20,000,000
shares are undesignated preferred stock ("Preferred Stock"). Upon completion of
the Transactions, Global One will have no outstanding shares of Preferred Stock,
and there is no current plan to designate or issue any shares of Preferred
Stock. Nevertheless, Global One's Board of Directors has the power to issue any
or all of these shares of unissued stock, including the authority to establish
the rights and preferences of the unissued Preferred Stock, without shareholder
approval. Among other consequences, the power to issue additional stock and to
establish separate classes or series of Preferred Stock may, in certain
circumstances, deter or discourage take-over attempts and other changes in
control of Global One not approved by the Board of Directors of Global One. See
"Comparison of the Rights of Holders of Global One Common Stock and Kelly
Russell Common Stock -- Global One."
MATERIAL RETURNS OF UNSOLD PRODUCTS
The Company has accepted product exchanges for credit from its retail
accounts on all posters, framed wall decor, buttons and key chains for which
there is a paid invoice. The Company obtains a credit on royalties and
commissions paid on product exchanges. Exchanges are not accepted from
distributors. In general, T-shirts are not returnable, except where the
merchandise is flawed. During 1995, the average returns rate was 12%. Management
believes that this policy with respect to exchanges for credit ensures that
unsuccessful titles will be replaced in a timely manner with titles that may
generate current sales. However, no assurances can be given that Global One will
not experience material returns in the future or that Global One will be able to
replace unsuccessful titles with successful ones, either of which could have a
material adverse effect on Global One's results of operations.
GENERAL INFORMATION REGARDING THE MEETING
This Proxy Statement/Prospectus is being furnished to the shareholders of
Kelly Russell in connection with the solicitation by the Board of Directors of
Kelly Russell of proxies to be voted at the Meeting to be held on , 1996.
All information in this Proxy Statement/Prospectus with respect to Kelly Russell
has been furnished by Kelly Russell and all information with respect to Global
One, the Company and the Global One Subsidiaries has been furnished by the
Company.
At the Meeting, Kelly Russell shareholders will be asked to consider and
vote upon the approval of the Merger Agreement, providing for the merger of
Kelly Russell with and into KRSI Acquisition, a wholly owned subsidiary of
Global One. KRSI Acquisition shall change its name to and conduct its business
under the name "Kelly Russell Studios, Inc." A copy of the Merger Agreement is
attached as Appendix A to this Proxy Statement/Prospectus.
THE BOARD OF DIRECTORS OF KELLY RUSSELL HAS UNANIMOUSLY APPROVED THE KRSI
MERGER. The Board of Directors of Global One and KRSI Acquisition have each
approved the KRSI Merger and the issuance of shares of Global One Common Stock
in the KRSI Merger. See "The KRSI Merger, the Reorganization and the Private
Placement -- Background of the KRSI Merger and the Reorganization." Applicable
Minnesota law requires that Kelly Russell shareholders approve the KRSI Merger.
Pursuant to the Merger Agreement, upon effectiveness of the KRSI Merger,
each two outstanding shares of Kelly Russell Common Stock will be converted into
the right to receive one share of Global One Common Stock. In lieu of issuing
fractional shares, Global One will issue one additional share of
17
<PAGE>
Global One Common Stock to each holder who would be entitled to receive a
fractional share. See "The KRSI Merger, the Reorganization and the Private
Placement -- General; -- Conversion of Kelly Russell Common Stock in the KRSI
Merger; and -- Exchange of Certificates in the KRSI Merger."
The close of business on July 19, 1996 (the "Record Date") has been fixed as
the Record Date for determination of the holders of Kelly Russell Common Stock
who are entitled to notice of and to vote at the Meeting or at any adjournment
thereof. Kelly Russell has only one class of capital stock outstanding, Common
Stock, $.01 par value per share. As of the Record Date, there were 4,082,373
shares of Kelly Russell Common Stock outstanding held by approximately 127
holders of record. Based on information which Kelly Russell has obtained from
its transfer agent, there are approximately 630 shareholders of Kelly Russell
Common Stock whose stock is held either in nominee name and/or street name
brokerage accounts. The holders of record on the Record Date of shares of Kelly
Russell Common Stock are entitled to one vote per share at the Meeting. The
presence at the Meeting in person or by proxy of the holders of a majority of
the outstanding shares of Kelly Russell Common Stock entitled to vote shall
constitute a quorum for the transaction of business. The affirmative vote of the
holders of a majority of the outstanding shares of Kelly Russell Common Stock is
required for approval of the KRSI Merger. See "The KRSI Merger, the
Reorganization and the Private Placement -- Vote Required to Approve the KRSI
Merger."
A proxy card is enclosed for use by Kelly Russell shareholders. Such
shareholders are solicited on behalf of the Board of Directors of Kelly Russell
to SIGN AND RETURN THE PROXY CARD IN THE ACCOMPANYING ENVELOPE. No postage is
required if mailed within the United States. QUESTIONS OR REQUESTS FOR
ASSISTANCE IN COMPLETING AND SUBMITTING PROXY CARDS MAY BE DIRECTED TO
AT THE ADDRESS OR TELEPHONE NUMBER LISTED ON THE COVER OF THIS PROXY
STATEMENT/PROSPECTUS.
All properly executed proxies not revoked will be voted at the Meeting in
accordance with the instructions contained therein. Proxies containing no
instructions will be voted in favor of approval of the Merger Agreement. A
shareholder who has executed and returned a proxy may revoke it at any time
before it is voted, but only by executing and returning a proxy bearing a later
date or, by giving written notice of revocation to an officer of Kelly Russell.
Abstentions will be treated as shares present for purposes of determining a
quorum for the Meeting but will have the same effect as a vote against approval
of the Merger Agreement. If a broker or other record holder or nominee indicates
on a proxy that it does not have direction or authority as to certain shares to
vote on the Merger Agreement, those certain shares will not be considered as
present at the Meeting with respect to the vote on the Merger Agreement.
If any other matters are properly presented for consideration at the
Meeting, the persons named in the enclosed form of proxy and acting thereunder
will have discretion to vote on such matters in accordance with their best
judgment.
THE BOARD OF DIRECTORS OF KELLY RUSSELL STUDIOS RECOMMENDS THAT THE
SHAREHOLDERS VOTE FOR THE APPROVAL OF THE MERGER AGREEMENT. See "The KRSI
Merger, the Reorganization and the Private Placement -- Interests of Certain
Persons in the KRSI Merger" for a discussion of conflicts of interest that
certain directors and members of management have in connection with the KRSI
Merger.
SHAREHOLDERS SHOULD NOT SEND THEIR STOCK CERTIFICATES WITH THEIR PROXY
CARDS.
In addition to the solicitation of proxies by use of mail, the directors,
officers or regular employees of Kelly Russell may, but without compensation
other than their regular compensation, solicit proxies personally or by
telephone or facsimile. Such directors, officers and employees will not be
additionally compensated, but may be reimbursed for reasonable out-of-pocket
expenses in connection with such solicitation. Each of Kelly Russell and the
Company shall pay the expenses and fees of their respective counsel, accountants
and financial advisors in connection with the preparation of this Registration
18
<PAGE>
Statement and the Proxy Statement/Prospectus. Kelly Russell and the Company have
agreed to share equally all expenses relating to the printing and mailing of
this Proxy Statement/Prospectus and the filing of it with the Commission and the
costs and fees of the Exchange Agent.
The mailing of this Proxy Statement/Prospectus to shareholders of Kelly
Russell is expected to commence on or about , 1996.
THE KRSI MERGER, THE REORGANIZATION AND THE PRIVATE PLACEMENT
SET FORTH BELOW IS A BRIEF DESCRIPTION OF CERTAIN TERMS OF THE MERGER
AGREEMENT AND RELATED MATTERS. THIS DESCRIPTION IS COMPLETE IN ALL MATERIAL
RESPECTS, BUT SHOULD BE READ IN CONJUNCTION WITH THE MERGER AGREEMENT, WHICH IS
ATTACHED HERETO AS APPENDIX A AND IS INCORPORATED BY REFERENCE HEREIN.
GENERAL
Kelly Russell, Global One, the Company, the OSP Shareholders, and the Global
One Subsidiaries have entered into the Merger Agreement, which provides, among
other things, that Kelly Russell will at the Effective Time be merged with and
into KRSI Acquisition, and immediately prior to the Effective Time the Company
will be merged with and into OSP Acquisition and BEx will be merged with and
into BEx Acquisition. Promptly after the effective time of the KRSI Merger (the
"Effective Time"), KRSI Acquisition, OSP Acquisition and BEx Acquisition will
change their respective names to, and conduct their respective businesses under,
the names "Kelly Russell Studios, Inc.," "OSP Publishing, Inc." and "The Button
Exchange, Inc.," respectively. Each two outstanding shares of Kelly Russell
Common Stock will be converted at the Effective Time into the right to receive
one share of Global One Common Stock. In addition, each share of OSP Common
Stock issued and outstanding immediately prior to the Effective Time will be
converted into the right to receive 3,941.37 shares of Global One Common Stock."
EFFECTIVE TIME OF THE KRSI MERGER AND THE REORGANIZATION
As soon as practicable after the conditions to consummation of the KRSI
Merger described below have been satisfied or waived, and unless the Merger
Agreement has been terminated as provided below (i) certificates of merger will
be filed with the Secretaries of State of the States of Delaware and Minnesota,
at which time the KRSI Merger will become effective, (ii) certificates of merger
will be filed with the Secretaries of State of the States of Delaware and
California to effect the OSP Merger and (iii) certificates of merger will be
filed with the Secretaries of State of the States of Delaware and Michigan to
effect the BEx Merger. It is presently contemplated that the Effective Time will
be as soon as practicable after approval of the Merger Agreement at the Meeting.
BACKGROUND OF THE KRSI MERGER AND THE REORGANIZATION
The terms of the Merger Agreement are the result of arm's-length
negotiations between representatives of Kelly Russell and Global One. The
following is a brief discussion of the background of these negotiations, the
KRSI Merger and the Transactions.
During December 1994, after recording a charge to operations of $1,100,000
and using cash in operating activities in excess of $3,700,000 in 1994, Kelly
Russell's Board of Directors hired new management and completely revised Kelly
Russell's business plan and operations. See "Kelly Russell Studios, Inc.
Management's Discussion and Analysis of Financial Condition and Results of
Operations."
Although Kelly Russell's operations improved in 1995, anticipated sales and
profitability failed to materialize. Kelly Russell's sales improved only
nominally while its losses were reduced from $5,216,000 in 1994 to $1,543,000 in
1995. In addition, Kelly Russell used in excess of $2,200,000 of cash in
operating activities in 1995.
In February 1996, Kelly Russell took steps to reduce operating costs through
the termination of several employees and limiting the number of sports images it
would market. In its Form 10-KSB for
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1995, Kelly Russell reported that it had explored various alternatives to
generate acceptable revenue growth without success, and that it would need to
obtain additional debt or equity financing in order to finance its operations
through 1996.
In September 1995, George Vrabeck, President of Kelly Russell, contacted
Joseph Angard, President of the Company, to discuss whether the Company would be
interested in being acquired by Kelly Russell. Messrs. Vrabeck and Angard
discussed the entertainment and sports licensing industry, exchanged their views
on the future direction of entertainment and sports licensing, and then
discussed the possible advantages of combining the two businesses. They agreed
that it would be prudent for both companies to continue merger discussions.
In October 1995, Mr. Angard authorized Mr. Vrabeck to contact the Company's
financial advisor, Tamarix Capital Corporation ("Tamarix"). Mr. Vrabeck and a
representative of Tamarix had a preliminary discussion about the possible
combination of Kelly Russell and the Company. Following this discussion, Mr.
Vrabeck met with the Board of Directors of Kelly Russell on October 16, 1995 and
communicated to the Board of Directors his reasons for instituting the
discussions and the extent of the discussions with Mr. Angard and the Company's
financial advisor. The reasons presented by Mr. Vrabeck to the Board of
Directors as follows:
1. Kelly Russell could not compete in the entertainment market with the
Company because of the Company's licensing capabilities and contacts;
2. Kelly Russell's ability to expand sales at an acceptable level is
limited because it lacked sufficient distribution capabilities;
3. Kelly Russell's original art concept has a better look, but it is
expensive and not sufficiently better than photograph art to prevent
imitations;
4. Because of Kelly Russell's cost structure, it cannot assure
profitability in 1996 even with a significant increase in sales;
5. Kelly Russell will require additional debt or equity funding, or
both, to continue operations, and such funding cannot be assured; and
6. The combination of the Company's marketing, sales and licensing
expertise with Kelly Russell's sports licenses should result in a strong
sales driven company.
The Board of Directors authorized Mr. Vrabeck to continue the discussions
and agreed to retain Equisource as Kelly Russell's investment banker to provide
the Board with a fairness opinion that a merger with The Company would be fair,
from a financial point of view, to Kelly Russell shareholders.
In early November 1995, Mr. Vrabeck went to California to meet with Mr.
Angard and to tour the Company's facilities. After inspecting the Company's
California facility, Mr. Vrabeck and Mr. Angard discussed the product lines of
the Company and Kelly Russell. Mr. Vrabeck suggested to Mr. Angard that Kelly
Russell's sport licenses and original art capability together with the Company's
entertainment licenses and strong distribution network would result in a
combined company uniquely positioned for expansion. Mr. Angard and Mr. Vrabeck
agreed that it was in the interest of both companies to continue discussions
about a possible combination of the Company and Kelly Russell.
On November 28, 1995, the Kelly Russell Board of Directors had a meeting at
which Kelly Russell's management presented certain financial projections for
Kelly Russell. Projections for 1995 and 1996 showed significant losses and
negative cash flow. The Board expressed its disappointment with the projections
and began discussing alternatives for Kelly Russell to avoid or minimize the
impact of the projected losses, including the possible combination of Kelly
Russell and the Company. The Board of Directors agreed that Kelly Russell and
the Company had definite synergies and that Kelly Russell would have difficulty
competing with the Company in the entertainment arena. In
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November 1995, representatives of Equisource, Kelly Russell and Kelly Russell's
legal counsel visited the Company's California facilities to commence Kelly
Russell's due diligence investigation of the Company.
On December 16, 1995, a representative of Equisource made a presentation to
the Kelly Russell Board of Directors regarding the Company's business and
indicated that the Company was interested in Kelly Russell's sports licenses and
original art, its access to Target stores and its management. Concurrently,
representatives of Equisource and Tamarix began to discuss the specific terms of
a combination of Kelly Russell and the Company. The Equisource representative
explained that the Company has sales of about $40,000,000, entrepreneurial
management, strong marketing and had achieved a strong position in the
entertainment licensing business. The Equisource representative also reviewed
with the Board of Directors the Company's projected results for 1996. If a
combination of the Company and Kelly Russell were to occur, the Company proposed
that approximately 57% of the combined company would be owned by the OSP
Shareholders, approximately 21% would be owned by Kelly Russell shareholders and
the remaining 22% of the shares would be sold to new investors. Equisource
advised the Kelly Russell Board of Directors that the Company was seeking a
binding letter of intent, but the Kelly Russell Board of Directors determined
that it was in the interest of both parties to proceed directly to a definitive
agreement.
In December 1995, representatives of Kelly Russell and Equisource met with
representatives of Tamarix to negotiate the terms of a combination of Kelly
Russell and the Company. On December 27, 1995, the Kelly Russell Board of
Directors held a meeting via telephone conference. The Board of Directors
reviewed a proposed term sheet for a combination of Kelly Russell and the
Company. Extensive discussions took place about proposed warrants, employment
agreements, timing, outside financing, the form of a definitive agreement and
other matters. Following the discussion, the Board of Directors authorized
Equisource to submit the term sheet and, if accepted, to proceed with
negotiation of a definitive agreement, subject to Board of Directors and
shareholder approval. In late December 1995, representatives of the Company and
Tamarix visited Kelly Russell's Minneapolis facilities to inspect the operation
and business of Kelly Russell and begin due diligence.
Through January and early February 1996, Mr. Vrabeck made three trips to the
Company's offices in California to continue negotiations and to discuss how the
combined companies could cooperate prior to the merger and how they would
operate after the merger. In late February 1996, representatives of the Company,
Tamarix and the Company's legal counsel and accountants continued the Company's
due diligence investigation of Kelly Russell in Minneapolis.
On February 20, 1996, the Kelly Russell Board of Directors met. Also in
attendance at the meeting were representatives of Miller, Johnson & Kuehn,
Incorporated ("MJK"). Lower than projected sales from November through February
had resulted in a cash shortage for Kelly Russell. The MJK representatives
informed the Board of Directors that MJK would be reluctant to provide
additional funding to Kelly Russell. The directors expressed their strong
concerns about Kelly Russell's financial position and its ability to continue to
fund operations. The Board of Directors instructed Kelly Russell management to
immediately reduce costs and authorized management to use the Company to assist
with sales distribution. The Board of Directors reiterated its interest in
moving as quickly as possible to a Merger Agreement.
In March, 1996, the Equisource representative advised the Board of Directors
that the proposed combination of Kelly Russell and the Company was fair, from a
financial point of view, to the Kelly Russell shareholders. After further
negotiations with representatives of the Company, the parties signed the initial
merger agreement. On March 27, 1996, Kelly Russell issued a press release
announcing the execution of a merger agreement between Kelly Russell and the
Company. Subsequent to such date, the parties reevaluated the planned structure
of the resulting entity contemplated in the initial merger agreement and
determined that the optimal corporate structure for the parties would be for
OSP, BEx and Kelly Russell to operate as wholly-owned subsidiaries of a
newly-formed holding company and for each of the corporations to be incorporated
in Delaware. Therefore, on May 28, 1996,
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the Merger Agreement was amended and restated to reflect changes in the
structure of the transaction pursuant to which the parties agreed to merge OSP,
BEx and Kelly Russell into the Global One Subsidiaries.
On May 1, 1996, the Board of Directors of Kelly Russell reviewed the final
terms of the Merger Agreement with OSP, reviewed in detail the Equisource
fairness opinion documentation and ratified and confirmed the initial merger
agreement executed by Kelly Russell and OSP on March 27, 1996. On May 22, 1996,
by written action, the Kelly Russell Board of Directors reviewed and approved
the Merger Agreement.
THE PRIVATE PLACEMENT
In anticipation of the KRSI Merger and Reorganization, Global One undertook
the Private Placement in order to provide additional working capital to Global
One and to pay an accrued dividend to OSP Shareholders. The Private Placement is
expected to provide to Global One net proceeds of approximately $1.8 million,
after paying the $1.75 million dividend, repaying $375,000 of subordinated debt,
taking into account the approximately $2.2 million in costs related to the
Transactions and paying an additional dividend of approximately $600,000 to
permit the OSP Shareholders to pay their respective tax liabilities incurred as
a result of OSP's operating results during 1995. The subscription period for the
Private Placement ended on May 28, 1996. The Private Placement will be
consummated concurrently with the Reorganization and the KRSI Merger at a single
closing to take place as soon as practicable following the approval of the KRSI
Merger by the requisite vote of the Kelly Russell shareholders at the Meeting.
KELLY RUSSELL REASONS FOR THE KRSI MERGER; RECOMMENDATION OF THE KELLY RUSSELL
BOARD OF DIRECTORS
The Kelly Russell Board of Directors believes that the KRSI Merger is in the
best interests of Kelly Russell shareholders and unanimously recommends to its
shareholders that they vote FOR approval of the Merger Agreement. See
"--Interests of Certain Persons in the KRSI Merger" for a discussion of
conflicts of interest that certain directors and members of management have in
connection with the KRSI Merger. In reaching these conclusions, the Kelly
Russell Board of Directors considered the continuing financial and operation
problems affecting Kelly Russell as well as the opportunities presented by the
proposed KRSI Merger. The Board of Directors recognized that Kelly Russell has
not been able to effectively compete in the entertainment market with the
Company because of the Company's licensing capabilities and contacts. Moreover,
the Board of Directors reasoned that Kelly Russell's lack of distribution
capabilities has hindered its ability to expand sales to an acceptable level.
Although Kelly Russell's original art concept results in an attractive product,
the Board of Directors concluded that the expense of such products and inability
to prevent imitations are disadvantages. The Board of Directors was also
concerned about Kelly Russell's ability to continue independent operations given
its financial condition. Even with a significant increase in sales, Kelly
Russell could not be assured of profitability in 1996 due to its cost structure.
Moreover Kelly Russell will require significant additional debt or equity
funding, or both, to continue its operations, and the Board of Directors had no
assurance that such funding would be available. In light of the foregoing
operational and financial difficulties, the Board of Directors concluded that
the proposed combination with the Company could provide an attractive
alternative for the Kelly Russell's shareholders. The Board of Directors
believes that the shareholders will benefit from the synergies that result from
the combination of the Company's marketing, sales and licensing expertise with
Kelly Russell's sports' licenses. These factors, together with the opinion of
Equisource stating that the KRSI Merger is fair, from a financial point of view,
to the shareholders of Kelly Russell, are the key reasons underlying the Board
of Directors' decision to approve the transaction and recommend that
shareholders approve as well. See "-- Kelly Russell's Financial Advisors" and
"Market Price of and Dividends on OSP Common Stock, Global One Common Stock and
Kelly Russell Common Stock."
THE COMPANY'S REASONS FOR THE KRSI MERGER AND REORGANIZATION
The Company's management believes that OSP is the largest domestic publisher
and distributor of licensed posters. In addition, the Company develops,
publishes and distributes an extensive product
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line of novelty and gift items, including framed and unframed wall decor,
buttons, key chains, stickers, movie scripts, T-shirts and hats, all of which
are licensed products. Currently, the Company's only significant involvement in
the sports-related licensed products industry consists of distributing other
licensee's posters. The Company believes that expansion of this segment of the
market into publication and distribution of its own licensed products represents
a significant business opportunity and is a natural complement to the Company's
existing product lines.
The Company believes that the KRSI Merger presents the opportunity to
combine the complementary product lines of the existing businesses of the
Company and Kelly Russell. The KRSI Merger will enable Global One to increase
immediately the array of products available to customers and to enter the
sports-related licensed products business through acquisition of Kelly Russell's
existing licenses. Additionally, the Company believes that Global One will be
well-positioned to more effectively promote the sale of Kelly Russell's products
through the Company's current distribution channels, and that the combined
operations will result in greater diversification opportunities and enhanced
market penetration. The Company believes that the shareholders of the Company
and Kelly Russell will benefit from the synergies achieved as a result of using
the Company's existing distribution channels to market the sports and
entertainment products that Kelly Russell licenses. Kelly Russell's current
shareholder base will also enable Global One to achieve more immediate and
widespread dissemination of the Global One Common Stock as Global One positions
itself for future growth as a public company.
The Company is undertaking the Reorganization principally in connection with
the KRSI Merger. The Company believes, in light of the KRSI Merger, that the
reincorporation of OSP and BEx as Delaware corporations and the organization of
these companies and Kelly Russell as wholly-owned subsidiaries of Global One
affords the combined entities with an advantageous corporate structure and
additional flexibility to manage future growth and transactions, compared with a
combination of these companies into one surviving entity. However, Global One
will in the future continue to evaluate such structure and whether it would be
more favorable to reorganize or combine one or more of its subsidiaries.
OPERATIONS AND MANAGEMENT AFTER THE TRANSACTIONS
Global One's business strategy is to generate revenue and earnings growth
through successful additional market penetration with existing products,
acquisitions and the introduction of new product lines which complement and
supplement existing product lines that can be sold through the Company's current
channels of distribution. See "Business of The Company -- Business Strategy."
Following the Transactions, Global One will conduct its business through its
wholly owned subsidiaries: OSP Publishing, Inc., Kelly Russell Studios, Inc.,
BEx Corp. and OSP Publishing, Inc.'s majority-owned subsidiary, Stanley
DeSantis, Inc. It is anticipated that additional subsidiaries may be added as a
result of future acquisitions of other companies and/or product lines that are
consistent with Global One's business and growth strategy. Global One may
conduct its various businesses either through operating subsidiaries of Global
One or through separate operating divisions of Global One or its subsidiaries.
The Merger Agreement provides that, immediately after the Effective Time,
the directors of Global One shall be Joseph C. Angard, Michael A. Malm, Mark S.
Hauser and Thomas R. King. The Merger Agreement further provides that,
immediately after the Effective Time, the officers of Global One shall be the
initial officers of Global One, plus George J. Vrabeck, who shall serve as
Executive Vice President. Joseph C. Angard will serve as Chairman of the Board,
Chief Executive Officer and President of Global One; Michael A. Malm will serve
as Chief Operating Officer of Global One and President of OSP; Stanley J.
DeSantis will serve as President of SDI; Christopher B. Lucas will serve as Vice
President-Finance and Chief Financial Officer of Global One; and Michael Berin
will serve as Vice President for Sales of OSP. Messrs. Angard, Malm, Vrabeck and
DeSantis will enter into employment agreements at or prior to the Effective Time
of the KRSI Merger on the terms described under "Management of Global One --
Employment Agreements."
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KELLY RUSSELL'S FINANCIAL ADVISORS
Kelly Russell has retained Equisource to provide an opinion to the Board of
Directors as to the fairness of the consideration to be received by the Kelly
Russell shareholders in connection with the KRSI Merger. Equisource is an
investment banking firm continually engaged in the valuation of businesses and
their securities in connection with mergers, acquisitions, sales of securities,
and valuation for estate, corporate and other purposes. Equisource was selected
by Kelly Russell on the basis of its familiarity with the industry in which
Kelly Russell and the Company operate.
As described above under "-- Background of the KRSI Merger and the
Reorganization," a representative of Equisource assisted Kelly Russell in
negotiating the terms of the KRSI Merger and in evaluating the Company as a
merger candidate. In March 1996, Equisource preliminarily advised Kelly
Russell's Board of Directors that, subject to completion of its formal analysis
supporting the merger terms, Equisource believed that the consideration to be
received in the KRSI Merger is fair to the Kelly Russell shareholders from an
financial point of view. In April 1996, Equisource delivered to the Board
members a Confidential Memorandum setting forth the methodology employed to
support its opinion together with information supporting the opinion. On May 28,
1996 Equisource delivered to the Board of Directors Equisource's written
opinion. A copy of the May 28, 1996 opinion is attached as Appendix B to this
Proxy Statement/Prospectus.
No limitations were imposed on Equisource with respect to the scope of its
investigation. Equisource relied, without independent verification, upon the
accuracy, completeness and fairness of all the financial and other information
provided by Kelly Russell and the Company or otherwise made available to
Equisource for purposes of its opinion. Equisource was not furnished with any
independent appraisal of the assets or liabilities of Kelly Russell or the
Company. In addition, Equisource does not express any opinion with respect to
the Private Placement or the Reorganization to be completed as a condition to
the Closing of the KRSI Merger.
For purposes of its opinion, Equisource reviewed: (i) the initial merger
agreement and the Merger Agreement; (ii) historical financial statements of
Kelly Russell and the Company; (iii) certain financial and operating information
for the Company, including forecasts provided by the Company; (iv) certain
financial and operating information relating to Kelly Russell, including
forecasts internally provided by Kelly Russell's management; (v) public market
price information and trading volumes for the Kelly Russell Common Stock from
March 31, 1994 to April 3, 1996; (vi) the operating results, financial condition
and market performance of various companies with publicly traded stock which
Equisource deemed to be engaged in businesses similar to Kelly Russell and the
Company; and (vii) such other information, analyses, investigations and
financial, economic and market criteria as Equisource deemed relevant. With
respect to the financial forecasts for the Company and Kelly Russell provided by
the Company's and Kelly Russell's managements, upon their advice, Equisource
assumed for purposes of its opinion that such forecasts were reasonably prepared
reflecting the best available estimates and judgments of the Company's and Kelly
Russell's managements as to the future performance of the respective companies,
and that they form a reasonable basis upon which Equisource could form its
opinion. Neither the Company nor Kelly Russell publicly discloses internal
management forecasts of the type provided to Equisource in connection with
Equisource's review of the proposed transaction and such forecasts were not
prepared with a view toward public disclosure. In addition, such forecasts were
based upon numerous variables and assumptions that are inherently uncertain,
including, without limitation, factors related to general economic and
competitive conditions. Accordingly, actual results could vary significantly
from those set forth in such forecasts. Equisource has assumed no liability for
such forecasts.
In conducting the review and in performing the analyses described below,
Equisource did not attribute any particular weight to any information or
analysis considered by it but rather made qualitative judgements as to the
significance and relevance of each factor and analysis. Accordingly, Equisource
believes that the information reviewed and the analysis conducted must be
considered as a
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whole and that considering any portion of such information or analysis without
considering all of such information and analysis could create a misleading or
incomplete view of the process underlying the opinion.
Equisource utilized various valuation methods to determine the value of
Kelly Russell apart from the KRSI Merger. Equisource analyzed the trading
history of Kelly Russell Common Stock including its price and trading volume to
determine (i) the relative reasonableness of the market price of Kelly Russell
Common Stock and (ii) whether the market value of Kelly Russell Common Stock
provided a valid basis for determining the fairness of the KRSI Merger.
Equisource analyzed the trading history of Kelly Russell in light of the
following information:
1. The limited trading volume of Kelly Russell Common Stock which is
largely conducted by a single market maker;
2. The issuance of Units (consisting of one share of Common Stock and a
Warrant to purchase one share of Common Stock) at $1.00 per Unit during
Kelly Russell's first quarter in 1995 while the market price of Kelly
Russell Common Stock traded at prices exceeding $2.875 per share;
3. Confidential information provided by Kelly Russell, which was
subsequently disclosed in April, 1996 in Kelly Russell's Annual Report on
Form 10-KSB for the year ended December 31, 1995. Such confidential
information included preliminary results of operations for the year ended
December 31, 1995, analysis of the sufficiency of Kelly Russell's working
capital and its need for additional working capital in order to continue
operations, and the intention of Kelly Russell's independent auditors to
include an explanatory paragraph relating to Kelly Russell's ability to
continue as a going concern.
In light of the information above, Equisource concluded that quoted market
prices for Kelly Russell Common Stock were not reasonable and did not provide a
valid basis for determining the fairness of the proposed transaction to Kelly
Russell shareholders.
To determine the value of Kelly Russell, Equisource considered the
information in the preceding paragraph, reviewed Kelly Russell's historical
performance, reviewed management projections for fiscal year ended 1996, and
made subjective evaluations as to the value of licenses held by Kelly Russell.
Equisource conducted discussions with Kelly Russell's management regarding
Kelly Russell's projected performance for fiscal year 1996, and Kelly Russell's
ability to continue as a going concern in light of its inability to raise
additional working capital. Kelly Russell projected an operating loss of
approximately $525,000 on sales of $5,000,000 for fiscal year ended December 31,
1996. Such projection assumed that Kelly Russell raised at least $500,000 in
additional working capital. Kelly Russell management informed Equisource that it
had not secured a source for additional financing and that there was a risk that
Kelly Russell would not be able to obtain financing from any source as a result
of Kelly Russell's historical and projected performance. As a result, Equisource
concluded that, without additional working capital Kelly Russell may not be able
to continue as going concern and fully exploit its licenses, which constitutes
the basis of its business.
Finally, Equisource reviewed and made a subjective determination as to the
value of licenses held by Kelly Russell. Equisource concluded that because the
licenses held by Kelly Russell are generally non-transferable, except in limited
circumstances, their value to Kelly Russell apart from the KRSI Merger or
similar transaction is limited, due to Kelly Russell's inability to continue to
exploit the value of the licenses. Although Equisource did not conduct a
detailed appraisal of all of Kelly Russell's assets, Equisource estimated that
the net realizable value of Kelly Russell in the event of liquidation would be
less than $1,000,000, or less than $0.25 per share for currently outstanding
Kelly Russell Common Stock.
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Based on its analysis of the information above and various valuation methods
discussed below, Equisource determined that the value of the consideration to be
paid to Kelly Russell shareholders in the KRSI Merger ranges from $0.65 per
share to $1.03 per share, which is substantially less than the public trading
price of $2.44 per share on the day preceding the announcement of the KRSI
Merger. Equisource estimated the value of Kelly Russell immediately prior to the
announcement of the KRSI Merger to be less than $0.65 per share.
CONCURRENT PRIVATE PLACEMENT. The Merger Agreement provides that the
obligations of Kelly Russell and the Company under the Merger Agreement are
subject to the condition, among others, that Global One shall have completed the
Private Placement with gross proceeds of at least $6,000,000. Global One has
received subscriptions from a limited number of accredited investors to acquire
$6,756,351 (4,504,234 shares) of Global One Common Stock at a price of $1.50 per
share. In the KRSI Merger, each Kelly Russell shareholder will receive one share
of Global One Common Stock for every two shares of Kelly Russell Common Stock.
Using the price paid for each share of Global One Common Stock subscribed for in
the Private Placement, the Kelly Russell Common Stock currently outstanding
would have an assumed value of $0.75 per share. In comparison, on March 26,
1996, the last business day immediately preceding the public announcement of the
KRSI Merger, the closing sale price for Kelly Russell Common Stock as reported
on the Nasdaq SmallCap Market was $2.44 per share and on May 28, 1996, the date
the final Merger Agreement was executed, the closing sale price for Kelly
Russell Common Stock was $2.25 per share.
COMPARABLE PUBLIC COMPANIES. Equisource reviewed and compared information
on eight public companies it consider to be engaged in similar businesses to
KRSI and OSP, together with general industry information, to develop a pro forma
stand alone valuation of OSP as a public Company. Based on this analysis,
Equisource determined a pro forma value of $17,100,000 for OSP. To calculate
this value, Equisource applied a multiple of 20 to adjusted 1995 earnings of
$750,000, giving this result a weighting of 80%. Equisource discounted future
earnings for 1996 by 30% and applied the same multiple to the discounted 1996
earnings, weighting this result at 20%. To arrive at adjusted net earnings of
$750,000 for 1995, Equisource added $800,000 to the pre-tax income shown in the
preliminary audit, representing various extraordinary and nonrecurring expenses,
including owner compensation, and have assumed a net additional tax cost of
$450,000 to reflect income tax treatment as a C corporation. Assuming Kelly
Russell has no immediate impact on the earnings of the surviving company after
the KRSI Merger, the implied value of Global One under this valuation approach
would be approximately $1.30 per share, or $0.65 per share for Kelly Russell's
currently outstanding shares.
DISCOUNTED CASH FLOW ANALYSIS. Equisource also reviewed estimated operating
results for OSP for 1996 and 1997, as provided by OSP management, and applied a
discounted cash flow analysis to calculate a present value of $27,081,000. To
account for risk inherent in projections, Equisource applied a discount rate of
30% to 1996 and 1997 estimated earnings and a multiple of 15 times 1997 earnings
to arrive at this valuation. Equisource assumed that the projected earnings
include the addition of Kelly Russell's operations. This method indicates a
value of approximately $2.05 per share, or $1.03 per share for Kelly Russell's
currently outstanding shares.
PROJECTED MARKET PRICES. In addition to the above analysis Equisource
projected per share prices for Global One common stock using estimated 1996 and
1997 earnings, discounted at 30%, with various multiples within the range of
existing and projected industry performance. At a multiple of 15 the indicated
prices would be $1.50 per share at the end of 1996 and $1.83 at the end of 1997.
At a multiple of 20 the prices would be $2.00 and $2.45 per share at the end of
1996 and 1997, respectively, and at a multiple of 25 the prices would be $2.50
and $3.06 per share at the end of 1996 and 1997, respectively.
Based on its analysis, Equisource concluded that the consideration offered
to Kelly Russell shareholders in connection with the KRSI Merger is fair from a
financial point of view to the Kelly
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Russell shareholders. Equisource believes its analysis supports this conclusion
even at the lower valuations established by its analysis due to the difficult
financial position of Kelly Russell when considered apart from the proposed
transaction.
On October 16, 1995, Kelly Russell entered into Financial Advisory Agreement
with Equisource that required payment of a non-reimbursable retainer of $15,000
which was paid on execution of the agreement and also provided for payment of a
fee to Equisource contingent upon the closing of a transaction described
therein. Upon the Closing, Equisource will be paid a fee of $365,000. In
addition to the cash fee, Equisource will receive warrants for the purchase of
up to 275,000 shares of Global One Common Stock at an exercise price of $1.50
per share.
Since Equisource is entitled to a substantial fee contingent upon the
Closing of the KRSI Merger, Equisource's determination as to the fairness of the
KRSI Merger to the Kelly Russell shareholders may have been influenced by the
financial advantages to Equisource which would result from the Closing of the
KRSI Merger. A completely objective financial advisor may have made different
assumptions or conducted a different analysis than those made or conducted by
Equisource and may have reached different conclusions. Nevertheless, the Board
of Directors of Kelly Russell believes that shareholders may rely on the
Equisource fairness opinion because the Board believes that the analysis set
forth in such opinion is reasonable and persuasive. Factors considered by the
Board in reaching this determination include, but are not limited to,
Equisource's use of multiples consistent with those applicable to
publicly-traded companies deemed similar to the Company, Equisource's use of
discount rates which the Board judged to be reasonable given the risks
associated with the Company's business, Equisource's use of valuation methods
which the Board considered appropriate and the expertise and reputation of
Equisource.
VOTE REQUIRED TO APPROVE THE KRSI MERGER
Approval of the KRSI Merger requires the affirmative vote of the holders of
a majority of the outstanding shares of Kelly Russell Common Stock. Each holder
of Kelly Russell Common Stock outstanding as of the Record Date is entitled to
one vote for each share held. On the Record Date, there were 4,082,373 shares of
Kelly Russell Common Stock outstanding. Of such shares, 477,166 shares
(approximately 10.7% of the outstanding shares of Kelly Russell Common Stock)
are held by directors and executive officers of Kelly Russell, all of whom have
indicated they plan to vote in favor of approval of the Merger Agreement.
CONVERSION OF KELLY RUSSELL COMMON STOCK IN THE KRSI MERGER
At the Effective Time, each two shares of Kelly Russell Common Stock issued
and outstanding immediately prior thereto, will be automatically converted into
the right to receive one share (the "Conversion Ratio") of Global One Common
Stock. The total number of Global One shares issuable to Kelly Russell
shareholders in the KRSI Merger will represent approximately 15.7% of the
approximately 12,993,509 shares of Global One Common Stock that will be
outstanding after consummation of the KRSI Merger, assuming no Kelly Russell
shareholders dissent from the KRSI Merger, no effect is given to options and
warrants to be outstanding after the KRSI Merger, and no outstanding options or
warrants to acquire shares of the Common Stock of the Company ("OSP Common
Stock") or Kelly Russell Common Stock are exercised or canceled prior to the
Effective Time.
TREATMENT OF KELLY RUSSELL OPTIONS AND WARRANTS
After the Effective Time, all of the options and warrants to purchase Kelly
Russell Common Stock will continue to have and be subject to substantially the
same terms and conditions, except that (i) each such option and warrant will
become fully vested and be exercisable for that number of shares of Global One
Common Stock which equals the number of shares of Kelly Russell Common Stock
covered by such option and warrant immediately prior to the Effective Time
divided by two (2) and rounded up to the nearest whole number; and (ii) the
exercise price per share under each such option and warrant shall equal the
exercise price before the KRSI Merger multiplied by two (2) and rounded to the
nearest cent.
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CONVERSION OF OSP COMMON STOCK AND WARRANTS IN THE REORGANIZATION
The OSP Merger and the BEx Merger will be effected immediately prior to the
Effective Time of the KRSI Merger. Each share of OSP Common Stock issued and
outstanding at the effective time of the OSP Merger will be converted into the
right to receive the number of shares of Global One Common Stock equal to the
Exchange Ratio. The Exchange Ratio means the number determined by dividing the
sum of (a) fifty percent (50%) of the amount of fully diluted Kelly Russell
shares plus (b) the amount of Global One Common Stock issued in the Private
Placement not in excess of 4,000,000, by the sum of (y) the number of shares of
OSP Common Stock outstanding immediately prior to the Effective Time and (z) the
number of shares of OSP Common Stock that would be issued immediately prior to
the Effective Time if all the outstanding warrants, options and any other rights
to acquire OSP Common Stock were exercised at such time. Each share of BEx
Common Stock issued and outstanding at the effective time of the BEx Merger will
be canceled and cease to be outstanding. All of the outstanding rights to
purchase OSP Common Stock outstanding at the effective time of the OSP Merger
will be converted into the right to acquire shares of Global One Common Stock
substantially on the same terms and conditions according to the above formula.
Pursuant to the above formula, at the Effective Time, it is anticipated that
the Exchange Ratio will be 3,941.374 (based on 1,636 shares of OSP Common Stock
outstanding immediately prior to the Effective Time), and therefore of the
approximately 12,993,509 shares of Global One Common Stock that will be
outstanding after consummation of the KRSI Merger, 6,448,088 shares or 49.6%
will be held by the OSP Shareholders, 2,041,187 shares or 15.7% will be held by
the Kelly Russell shareholders, and 4,504,234 shares or 34.7% will be held by
the investors in the Private Placement, assuming that no Kelly Russell
shareholders dissent from the KRSI Merger, no effect is given to options and
warrants to be outstanding after the KRSI Merger, and no outstanding options or
warrants to acquire shares OSP Common Stock or Kelly Russell Common Stock are
exercised or canceled prior to the Effective Time.
TREATMENT OF COMMON STOCK, OPTIONS AND WARRANTS OF GLOBAL ONE FOLLOWING THE KRSI
MERGER
Each share of Global One Common Stock issued and outstanding immediately
prior to the Effective Time of the KRSI Merger will remain outstanding. There
are no Global One options and warrants outstanding.
EXCHANGE OF CERTIFICATES IN THE KRSI MERGER
As soon as possible after the Effective Time, Norwest Bank National
Association (the "Exchange Agent") will mail a letter of transmittal to each
holder of record of Kelly Russell Common Stock which evidenced outstanding
shares of Kelly Russell immediately prior to the Effective Time. The letter of
transmittal will include instructions regarding the surrender of certificates
representing shares of Kelly Russell Common Stock in exchange for certificates
representing shares of Global One Common Stock. Upon surrender to the Exchange
Agent of one or more Kelly Russell Common Stock certificates from the record
holder, the Exchange Agent shall deliver to such holder one or more certificates
representing the appropriate number of Global One shares of Common Stock such
holder has the right to receive pursuant to the KRSI Merger.
No Common Stock certificates representing fractional shares of Global One
Common Stock will be issued and no Global One dividend, stock split or interest
will relate to any fractional share. No fractional share interests will entitle
the owner thereof to vote or to any rights of a shareholder. In lieu of any such
fractional share, each holder who would be entitled to receive a fractional
share shall receive one additional share of Global One Common Stock. KELLY
RUSSELL SHAREHOLDERS ARE REQUESTED NOT TO SURRENDER THEIR CERTIFICATES FOR
EXCHANGE UNTIL SUCH LETTER OF TRANSMITTAL AND INSTRUCTIONS ARE RECEIVED BY THEM.
After the Effective Time and until surrendered as provided above, Kelly Russell
Common Stock certificates will be deemed to represent only the right to receive
Global One Common Stock. The holder of certificates will not be entitled to
receive dividends or any other distributions from Global One until such
Certificates are so surrendered.
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CONDUCT OF BUSINESS PENDING THE KRSI MERGER AND THE REORGANIZATION
Pursuant to the Merger Agreement, Kelly Russell, the Company, Global One and
the Global One Subsidiaries have agreed that, prior to the Effective Time, each
will carry on its respective businesses in the ordinary course consistent with
past practice, use its reasonable best efforts to preserve intact its present
business organization and relationships with third parties and keep available
the services of its present officers and employees.
In addition, Kelly Russell, the Company, Global One and the Global One
Subsidiaries have each agreed that, except as contemplated by the Merger
Agreement, prior to the Effective Time each will not, directly or indirectly, do
any of the following without the prior written consent of the other: (i) amend
its articles of incorporation, certificate of incorporation, bylaws or other
comparable charter or organizational documents; (ii) declare, set aside or pay
any dividends or make any distributions in respect of any of its capital stock;
except the Company may declare a distribution to the OSP Shareholders in the sum
of $1,750,000 and an additional amount anticipated to be approximately $600,000
for the payment of the OSP Shareholders' tax liability for fiscal year ended
December 31, 1995; (iii) acquire or agree to acquire (a) by merging or
consolidating with, or by purchasing a substantial portion of the assets of, any
business or any corporation or other business organization or division thereof,
or (b) any assets that are material individually or in the aggregate to each of
them, other than in the ordinary course of business; (iv) sell, lease, license,
mortgage or otherwise encumber or subject to any lien or dispose of any
properties or assets; (v) incur any indebtedness for borrowed money or guarantee
any such indebtedness of another person, issue or sell any debt securities,
guarantee any debt securities of another person, enter into a "keep well" or
other agreement to maintain any financial statement condition of another person
or make any other loans or capital contribution or investments in any other
person, other than to their respective businesses or employees in accordance
with past practice; (vi) make or agree to make any new capital expenditure or
expenditures which, individually, is in excess of $50,000 or, in the aggregate,
are in excess of $100,000; (vii) make any material tax election or settle or
compromise any material tax liability; (viii) pay, discharge, settle or satisfy
any claims, liabilities or obligations, other than in the ordinary course of
business consistent with past practice or agree to modify in any material
respect, any confidentiality, standstill or similar agreements to which each is
a party; (ix) except in the ordinary course of business, modify, amend or
terminate any material contracts or agreements to which each is a party or
waive, lease or assign any material rights or claims; (x) enter into any
contracts, agreements, arrangements or understandings relating to the
distribution, sale or marketing by third parties of any of its products or
products licensed by it, except in the ordinary course of business; (xi) except
as required to comply with applicable law, or as contemplated by the Merger
Agreement adopt, enter into, terminate or amend any bonus, profit sharing,
thrift, compensation, stock option, restricted stock, pension, retirement,
deferred compensation or other plan, trust arrangement or fund for the benefit
or welfare of any director, officer or current or former employee, or increase
in any manner the compensation or benefits of, or pay any bonus to, any
director, officer or employee, except in the normal course of business, or pay
any benefit not provided under a employee benefit plan, or grant any awards
under bonus, incentive, performance or other compensation plan or arrangement or
employee benefit plan (including the grant of stock options) or take any action
to fund or in any way secure the payment of compensation or benefits under any
employee plan, contract or employee benefits plan; (xii) make any change in any
method of accounting, accounting practice or policy, other than required by
generally accepted accounting principles; or (xiii) authorize any of, or commit
or agree to take any of the foregoing actions.
CONDITIONS TO CONSUMMATION OF THE KRSI MERGER AND THE REORGANIZATION
The respective obligations of Kelly Russell and KRSI Acquisition to
consummate the KRSI Merger are subject to satisfaction at or prior to the
Effective Time of a number of conditions, including, but not limited to, the
following, any or all of which may be waived by mutual agreement by both
parties, in whole or in part, to the extent permitted by applicable law: (i) the
approval by the Kelly Russell shareholders of the Merger Agreement; (ii) the
closing by Global One of the Private Placement of its Common Stock raising at
least $6,000,000 in gross proceeds; (iii) all authorizations, consents, orders
or approvals of, or declarations or filings with, or expiration of waiting
periods imposed by any
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governmental entity shall have been filed, expired or been obtained; (iv) the
Registration Statement on Form S-4 pertaining to the KRSI Merger shall have been
declared effective by the Securities and Exchange Commission; (v) the
consummation of the KRSI Merger and any other transaction contemplated by the
KRSI Merger shall not be prohibited by any injunction or order of a court and
there shall not have been any action taken that makes consummation of the KRSI
Merger illegal; and (vi) no action shall have been taken, and no statute, rule,
regulation or order shall have been enacted, promulgated, or issued or deemed
applicable to any part of the KRSI Merger by any governmental entity which would
make the consummation of the KRSI Merger illegal or render Kelly Russell or
Global One unable to consummate the KRSI Merger.
The separate obligation of Kelly Russell to consummate the KRSI Merger is
also subject to the satisfaction of a number of additional conditions, including
the following, any or all of which may be waived by Kelly Russell in its sole
discretion: (i) each of the representations and warranties of Global One, BEx,
the Company and the OSP Shareholders contained in the Merger Agreement shall be
true and correct in all respects as of the date of the Merger Agreement and as
of the Closing, as though made as of the Closing; (ii) Global One, the Company
and BEx shall have performed or complied in all material respect with all
agreements and covenants required by the Merger Agreement to be performed or
complied with by each of them on or prior to the Effective Time; (iii) Global
One, the Company and BEx shall have obtained or received consents, approvals and
authorizations from certain licensors and other third parties; and (iv) Kelly
Russell shall have received a fairness opinion from Equisource to the effect
that the KRSI Merger and other transactions contemplated in the Merger Agreement
are fair to the shareholders of Kelly Russell from a financial point of view.
The respective obligations of the Company and BEx to consummate the KRSI
Merger are subject to the satisfaction of a number of conditions, including but
not limited to the following, any or all of which may be waived by the Company
and BEx in their sole discretion: (i) each of the representations and warranties
of Kelly Russell contained in the Merger Agreement shall be true and correct in
all respects as of the date of the Merger Agreement and as of the Closing, as
though made as of the Closing; (ii) Kelly Russell shall have performed or
complied in all material respects with all agreements and covenants required by
the Merger Agreement to be performed or complied with by Kelly Russell on or
prior to the Closing; (iii) Kelly Russell shall have obtained or received
consents, approvals and authorizations from certain licensors and other third
parties; and (vi) the Company shall have received a letter from Kelly Russell's
independent auditors or legal counsel with respect to the number of shares of
Kelly Russell Common Stock authorized for issuance in the Kelly Russell's
minutes and the number of shares of Kelly Russell Common Stock subject to
options and warrants to purchase them.
AMENDMENT, WAIVER AND TERMINATION OF THE MERGER AGREEMENT
Any of the terms and conditions of the Merger Agreement may be amended by
written agreement of the parties at any time before or after approval of the
Merger Agreement by Kelly Russell shareholders; provided, however, that no
amendment may be made to the Merger Agreement attached hereto as Appendix A,
that would reduce the amount or change the type of consideration received by the
shareholders of Kelly Russell or the Company upon consummation of the KRSI
Merger, without shareholders' approval.
At any time prior to the Effective Time, Kelly Russell, Global One, the
Company, the OSP Shareholders and the Global One Subsidiaries may: (i) extend
the time for the performance of any obligation or other act of any other party
hereto, (ii) waive any inaccuracy in the representations and warranties
contained herein or in any document delivered pursuant to the Merger Agreement,
and (iii) waive compliance with any agreement or condition contained in the
Merger Agreement. Agreements to extensions or waivers must be in writing.
The Merger Agreement may be terminated at any time prior to the Effective
Time; either before or after approval of the Merger Agreement by Kelly Russell
shareholders: (a) by mutual written consent of Kelly Russell and the Company;
(b) by Kelly Russell or the Company, (i) if for any reason,
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the Effective Time has not occurred by August 31, 1996, or (ii) if any law makes
consummation of the KRSI Merger illegal or prohibited, or (iii) if a court or
government entity issues an order, decree or ruling prohibiting the KRSI Merger
and such order, decree or ruling became final and unappealable; (c) by Global
One, (i) if Kelly Russell's Board of Directors withdraws, modifies or changes
its recommendation of the KRSI Merger, (ii) Kelly Russell receives an
unsolicited competing proposal or tender offer or exchange offer for 25% or more
of Kelly Russell outstanding shares and its Board of Directors, either fails to
terminate discussions with the proposal maker, accepts or takes no position with
respect to such proposal or offer, or (iii) any person or group acquires
beneficial ownership or the right to acquire beneficial ownership of 25% or more
of the then outstanding shares of Kelly Russell; (d) by Kelly Russell, if its
Board of Directors shall have recommended to its shareholders a competing
proposal; (e) by either Kelly Russell or the Company, if the Kelly Russell
shareholders shall have failed to approve the KRSI Merger and Merger Agreement;
or (f) by the Company or Kelly Russell upon a material breach of any
representation, warranty, covenant, or agreement on the part of the other set
forth in the Merger Agreement which has not been cured or is not curable by
August 31, 1996.
Under certain circumstances, Kelly Russell may become obligated to pay
liquidated damages in the amount of $250,000 to the Company. Such circumstances
include: (i) the Effective Time has not occurred on or before August 31, 1996 as
a result of material breach of the Merger Agreement by Kelly Russell; or (ii)
the failure of Kelly Russell shareholders to approve the KRSI Merger. In the
event the Company receives such liquidated damages, the Company, the OSP
Shareholders, Global One and the Global One Subsidiaries may not pursue any
other remedies or law or equity against Kelly Russell. Kelly Russell has
delivered to the Escrow Agent $125,000 and is obligated to deliver the Escrow
Agent an additional $125,000, pursuant to an escrow agreement providing for the
delivery of such funds to the Company in the event the circumstances listed
above should occur. See "-- Limitation on Negotiations."
EXPENSES AND FEES
Fees and expenses and out-of-pocket expenses incurred by Kelly Russell, the
Company and Global One will be borne by the party that incurs such expenses.
Additionally, all costs and expenses related to printing, filing and mailing the
Proxy Statement/Prospectus and all SEC and other regulatory filing fees incurred
in connection with the Proxy Statement/Prospectus shall be borne equally by
Kelly Russell and the Company.
REPRESENTATION AND WARRANTIES
The Merger Agreement contains various representations and warranties of the
parties thereto. The Company, Global One and the Global One Subsidiaries jointly
and severally represent and warrant as to (i) their corporate organization,
standing and power; (ii) their respective subsidiaries; (iii) their respective
authority to execute and deliver the Merger Agreement and its enforceability
with respect to the Company, Global One and the Global One Subsidiaries; (iv)
the absence of the need of the Company, Global One and the Global One
Subsidiaries to obtain approval or consent by any governmental entity; (v) the
non-contravention of any articles or by-laws of the Company, Global One and the
Global One Subsidiaries, any law, judgment or decree, or a breach or violation
of any agreement, license or creation of any lien on any assets of the Company,
Global One and the Global One Subsidiaries as a result of their execution of the
Merger Agreement; (vi) its capitalization; (vii) the accuracy of the Company's
financial statements, and books and records; (viii) the disclosure of material
transactions among Global One, the Company and the Global One Subsidiaries and
their affiliates and subsidiaries; (ix) the conduct of the Company's business in
the ordinary course, and the absence of certain changes since December 31, 1995;
(x) pending or threatened litigation; (xi) payment of taxes; (xii) ownership of
particular assets; (xiii) the absence of certain labor disputes; (xiv) existence
of certain employee benefit plans and compliance with applicable laws; (xv) the
possession of all required licenses and permits and compliance by the Company,
Global One and the Global One Subsidiaries with applicable laws; (xvi) existence
and fees of brokers, finders and investment bankers employed by the Company,
Global One or the Global One Subsidiaries; (xvii) the required vote of the OSP
Shareholders necessary to approve the KRSI Merger; (xviii) environmental
matters; (xix) the
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existence and enforceability of the Company's, Global One's and Global One's
Subsidiaries and their respective subsidiaries' intellectual property; (xx) the
enforceability and validity of material agreements and the absence of defaults
under such agreements; and (xxi) insurance. The OSP Shareholders jointly and
severally make representations and warranties to (i), (iii), (vi), (ix), (x),
(xvii) and (xviii) above.
The Merger Agreement includes representations and warranties by Kelly
Russell as to (i) its corporate organization, standing and power; (ii) its
authority to execute and deliver the Merger Agreement and its enforceability
with respect to Kelly Russell; (iii) the absence of the need of Kelly Russell to
obtain approval or consent by any governmental entity; (iv) the
non-contravention of any articles or by-laws of Kelly Russell any law, judgment
or decree, or a breach or violation of any agreement, license or creation of any
lien on any assets of Kelly Russell as a result of Kelly Russell's execution of
the Merger Agreement; (v) its capitalization; (vi) the accuracy of Kelly
Russell's financial statements, information contained in certain filings by
Kelly Russell with the SEC, and books and records; (vii) the disclosure of
material transactions among Kelly Russell and its affiliates; (viii) the conduct
of Kelly Russell's business in the ordinary course, and the absence of certain
changes since December 31, 1995; (ix) pending or threatened litigation; (x)
payment of taxes; (xi) ownership of particular assets; (xii) the absence of
certain labor disputes; (xiii) existence of certain employee benefit plans and
compliance with applicable laws; (xiv) the possession of all required licenses
and permits and compliance by Kelly Russell with applicable laws; (xv) existence
and fees of brokers, finder and investment bankers employed by Kelly Russell;
(xvi) the required vote of Kelly Russell shareholders necessary to approve the
KRSI Merger; (xvii) environmental matters; (xviii) the existence and
enforceability of Kelly Russell's intellectual property; (xix) the
enforceability and validity of material agreements and the absence of defaults
under such agreements; and (xx) insurance.
INTERESTS OF CERTAIN PERSONS IN THE KRSI MERGER
EMPLOYMENT AGREEMENT WITH CERTAIN EXECUTIVE OFFICERS
Mr. Vrabeck will enter into an employment agreement with Global One which
provides for the commencement of an employment relationship with Global One
immediately after the Effective Time (the "Vrabeck Employment Agreement"). Under
the terms of the Vrabeck Employment Agreement, Mr. Vrabeck will provide
full-time services to Global One as Executive Vice President for a three (3)
year term beginning at the Effective Time. During the period of Mr. Vrabeck's
employment, Global One shall pay him an initial base salary of $200,000, plus a
bonus equal to $25,000 annually and additional bonus of up to $25,000 annually
if he attains certain performance targets established by the Global One Board.
In addition, Global One shall issue to Mr. Vrabeck, options to purchase 300,000
shares of Common stock of the Company at $1.50 per share. Mr. Vrabeck shall also
be entitled to an automobile allowance, annual vacation, health and disability
insurance provided by Global One. If Mr. Vrabeck is terminated without cause
during the term of his employment, Mr. Vrabeck shall be provided a severance
payment in the amount of his base salary, plus his prorated guaranteed bonus
amount, continuous health insurance coverage during the remaining term of the
Employment Agreement and immediate vesting of all unvested stock options granted
to him. Mr. Vrabeck will retain his current options to purchase up to 200,000
shares of Kelly Russell Common Stock which at the Effective Time shall be
converted into options to purchase 100,000 shares of Global One Common Stock.
See "-- Treatment of Kelly Russell Options and Warrants."
Global One has also agreed to enter into employment agreements with Joseph
C. Angard, Michael A. Malm and Stanley DeSantis. See "Management of Global One
- -- Employment Agreements."
SERVICE AS A MEMBER OF GLOBAL ONE'S BOARD OF DIRECTORS
Thomas R. King has served as a director of Kelly Russell since March 1995
and Mr. King is a shareholder of Fredrikson & Byron, P.A., which has served as
legal counsel to Kelly Russell, including legal matters in connection with the
KRSI Merger. Immediately after the Effective Time, Mr. King will
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become a director of Global One. As a director of Global One, Mr. King will be
paid an annual retainer of $5,000, plus $1,500 per board or committee meeting
attended, and annually will receive options to purchase 5,000 shares of Global
One Common Stock at an exercise price of $1.50 per share.
DIRECTORS' AND OFFICERS' INDEMNIFICATION AND INSURANCE
The Merger Agreement provides that prior to the Effective Time, Kelly
Russell shall obtain directors' and officers' insurance coverage to provide
coverage of the Company's and Global One's officers and directors with respect
to claims that may be asserted by Kelly Russell shareholders or creditors
arising in connection with the KRSI Merger.
Global One and its shareholders agree to keep in effect the provisions in
Global One's by-laws with respect to exculpation of director and officer
liability and indemnification to the fullest extent permitted under Delaware
law. Global One agrees to obtain directors' and officers' insurance that will
provide for a minimum of $5 million of coverage for any claim.
Also, at the Effective Time, Global One shall enter into indemnification
agreements with each person who is a director or officer of Kelly Russell and
the Company immediately prior to the Effective Time, for the purpose of
indemnifying such person to the fullest extent permitted by Delaware law.
AGREEMENTS WITH KELLY RUSSELL SHAREHOLDERS
Global One entered into a Placement Agent Agreement with MJK dated May 17,
1996. Pursuant to the Placement Agent Agreement, MJK served as an agent of
Global One in connection with the Private Placement, the successful completion
of which is a condition to consummation of the KRSI Merger. At the Closing,
assuming that all subscription proceeds are received by Global One, MJK will
receive commissions in the amount of $610,635 and warrants to purchase 407,090
shares of Global One Common Stock at $1.50 per share, as well as reimbursement
of its legal expenses in an amount estimated to be not more than $10,000. D.B.
Johnson, a principal shareholder of Kelly Russell, is an affiliate of MJK. See
"Business of Kelly Russell Studios, Inc." and "Principal Shareholders and
Management of Kelly Russell -- Certain Relationships and Related Transactions."
LIMITATION ON NEGOTIATIONS
The Merger Agreement provides that Kelly Russell, the Company and Global One
shall not and their respective officers, directors, agents and affiliates shall
not directly or indirectly solicit, encourage or authorize any inquiry,
proposals, offer or possible offer from any person relating to any merger,
consolidation, or other combination, acquisition or purchase of all or a
substantial portion of the assets of, or any equity interest in, Kelly Russell,
the Company or Global One: however, Kelly Russell may under certain conditions,
including receipt of a written opinion of legal counsel to Kelly Russell stating
that the Kelly Russell Board of Directors has a fiduciary obligations to do so,
provide any person with information, assistance or negotiate with such person a
proposal, offer or possible offer. In the event that the Board of Directors of
Kelly Russell withholds or modifies its recommendation to its shareholders, the
KRSI Merger is not consummated and Kelly Russell enters into an agreement to
consummate a competing transaction within one year after the Board's withdrawal
or modification, Kelly Russell shall pay the Company $500,000 in cash, including
the $250,000 held in escrow as liquidated damages. See "-- Amendment, Waiver and
Termination of the Merger Agreement."
RESALE OF GLOBAL ONE COMMON STOCK
The Global One Common Stock issued pursuant to the KRSI Merger will be
freely transferable under the Securities Act, except for shares issued to any
Kelly Russell shareholder who may be deemed to be an affiliate (an "Affiliate")
of Kelly Russell and/or Global One for purposes of Rule 145 under the Securities
Act. Affiliates would include persons (including executive officers and
directors) who control, are controlled by, or are under common control with (i)
Global One or Kelly Russell at the time of the Meeting or (ii) Global One at or
after the Effective Time.
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Rule 145 promulgated by the SEC under the Securities Act restricts the sale
of Global One Common Stock received in the KRSI Merger by Affiliates and certain
of their family members and related parties. Generally, during the two years
following the Effective Time, Affiliates of Kelly Russell, provided they are not
Affiliates of Global One, may publicly resell Global One Common Stock received
by them in the KRSI Merger, subject to certain limitations as to the amount of
Global One Common Stock sold by them in any three-month period and as to the
manner of sale. After the two-year period, such Affiliates of Kelly Russell who
are not Affiliates of Global One may resell their shares without such
restrictions so long as there is adequate current public information with
respect to Global One as required by Rule 144. Persons who become Affiliates of
Global One prior to, at or after the Effective Time may publicly resell the
Global One Common Stock received by them in the KRSI Merger subject to similar
limitations and subject to certain filing requirements specified in Rule 144.
The ability of Affiliates to resell shares of Global One Common Stock received
in the KRSI Merger under Rule 144 or 145 as summarized herein generally will be
subject to Global One having satisfied its Exchange Act reporting requirements
for specified periods prior to the time of sale. Affiliates also would be
permitted to resell Global One Common Stock received in the KRSI Merger pursuant
to an effective registration statement under the Securities Act or another
available exemption from the Securities Act registration requirements.
THIS PROXY STATEMENT/PROSPECTUS DOES NOT COVER ANY RESALES OF GLOBAL ONE
COMMON STOCK RECEIVED BY PERSONS WHO MAY BE DEEMED TO BE AFFILIATES OF GLOBAL
ONE OR KELLY RUSSELL.
ACCOUNTING TREATMENT OF THE KRSI MERGER
The KRSI Merger will be treated as a "purchase" for accounting and financial
reporting purposes. Global One will allocate the purchase price based on the
fair value of the assets acquired and the liabilities assumed. Goodwill arising
from the KRSI Merger is expected to be amortized over 10 years. The
Reorganization will be treated as a "pooling" for accounting and financial
reporting purchases.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
THE FOLLOWING DISCUSSION SUMMARIZES THE OPINION OF MANATT, PHELPS &
PHILLIPS, LLP TO THE COMPANY, KELLY RUSSELL, AND THE KELLY RUSSELL SHAREHOLDERS
AS TO CERTAIN TAX MATTERS, AND IS COMPLETE IN ALL MATERIAL RESPECTS. IT DEALS
ONLY WITH FEDERAL INCOME TAXES AND DOES NOT DEAL WITH EVERY FEDERAL INCOME TAX
ASPECT OF THE KRSI MERGER. IT DOES NOT DISCUSS ANY STATE, LOCAL OR FOREIGN
INCOME OR OTHER TAXES. TAXPAYERS IN SPECIAL CATEGORIES MAY HAVE UNIQUE RULES
APPLICABLE TO THEM THAT THIS DISCUSSION DOES NOT ADDRESS.
Global One will not apply for a ruling from the IRS regarding the federal
income tax consequences of the KRSI Merger. In recent years the IRS has greatly
restricted the issuance of private rulings in the case of corporate formations
and reorganizations. Global One believes that, as a result of these
restrictions, it is unlikely that the IRS would issue a private ruling in this
case.
Global One has received an opinion of counsel from Manatt, Phelps &
Phillips, LLP, that holders of Kelly Russell Common Stock who receive Global One
Common Stock in exchange for their Kelly Russell Common Stock will not recognize
gain or loss as a result of receipt of Global One Common Stock, will tack their
holding periods for the Kelly Russell Common Stock in computing their holding
periods for Global One Common Stock (assuming they hold the Kelly Russell Common
Stock as capital assets), and will take a substituted basis for Global One
Common Stock computed by reference to the basis for their Kelly Russell Common
Stock. In the opinion of counsel, no gain or loss will be recognized at the
corporate level as a result of the KRSI Merger.
The view of counsel of the transactions outlined above is consistent with
published and private rulings of the IRS. Nevertheless, no absolute assurance
can be given that the IRS will be willing to view the transaction in this
manner.
Kelly Russell also has a net operating loss carry forward for federal income
tax purposes. It may have built-in loss assets as well. However, it is
anticipated that the KRSI Merger will result in an
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<PAGE>
"ownership change" for Kelly Russell which will restrict the use of the net
operating loss carry forward and the built-in losses to offset income of members
of the Global One group of corporations after the Closing of the Transactions.
INDEMNIFICATION
Global One, the Company and the OSP Shareholders have agreed to indemnify
Kelly Russell against any damages, losses, costs and expenses incurred in
connection with any material breach by Global One, the Company, the Global One
Subsidiaries or the OSP Shareholders of any of their respective representations,
warranties or covenants in the Merger Agreement. Kelly Russell may not assert
claims for indemnification unless and until the aggregate of such claims exceeds
$50,000, and any such claim must be asserted within one year from the Effective
Time of the KRSI Merger. Similarly, Kelly Russell has agreed to indemnify Global
One, the Company and the OSP Shareholders against all damages, losses, costs and
expenses incurred in connection with any material breach by Kelly Russell of any
of its representations, warranties and covenants in the Merger Agreement. Global
One, the Company and OSP Shareholders may not assert any claims for
indemnification against Kelly Russell unless and until the aggregate of such
claims exceeds $50,000, and any such claim must be asserted within one year from
the Effective Time of the KRSI Merger.
REGULATORY APPROVALS
Kelly Russell and the Company are not aware of any governmental or
regulatory requirements relating to consummation of the KRSI Merger or the
proposals to be considered at the Kelly Russell meeting other than compliance
with applicable federal and state securities laws.
RIGHTS OF DISSENTING SHAREHOLDERS
The following discussion of the law pertaining to dissenters' rights under
the Minnesota Business Combination Act ("MBCA") is complete in all material
respects, but should be read in conjunction with the full text of Section
302A.471 and 302A.473 of the MBCA attached to this Proxy Statement as APPENDIX
C. ANY SHAREHOLDER WHO WISHES TO EXERCISE SUCH DISSENTERS' RIGHTS OR WHO WISHES
TO PRESERVE HIS OR HER RIGHT TO DO SO SHOULD REVIEW THE FOLLOWING DISCUSSION AND
APPENDIX C CAREFULLY BECAUSE FAILURE TO TIMELY AND PROPERLY COMPLY WITH THE
PROCEDURES SPECIFIED WILL RESULT IN THE LOSS OF DISSENTERS' RIGHTS UNDER THE
MBCA.
PROCEDURE TO PRESERVE DISSENTERS' RIGHTS
Under Minnesota law, any holder of Kelly Russell Common Stock who follows
the procedures set forth in Section 302A.473 of the MBCA will be entitled to
receive payment in cash of the "fair value" of such shareholder's shares.
Under Section 302A.473 of the MBCA, if a corporation calls a shareholder
meeting at which a plan of merger to which such corporation is a party is to be
voted upon, the notice of the meeting must inform each shareholder of the right
to dissent and must include a copy of sections 302A.471 and 302A.473 of the MBCA
and a brief description of the procedures to be followed under such sections.
This Proxy Statement/Prospectus constitutes such notice to the shareholders of
Kelly Russell and the applicable statutory provisions of the MBCA are attached
to this Proxy Statement/Prospectus as APPENDIX C.
The Merger Agreement must be approved by the holders of a majority of the
outstanding shares of Kelly Russell Common Stock. A shareholder who wishes to
exercise dissenters' rights must file with Kelly Russell before the vote on the
Merger Agreement a written notice of intent to demand the fair value of the
shares owned by such shareholder and must not vote his or her shares in favor of
the Merger Agreement.
The "fair value of the shares" means the value of the shares of Kelly
Russell immediately before the Effective Time of the KRSI Merger.
After the proposed KRSI Merger has been approved by the Kelly Russell Board
and the Kelly Russell shareholders, Kelly Russell must send a written notice to
all shareholders who have not voted
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their shares in favor of the Merger Agreement and who have filed with Kelly
Russell before the vote on the Merger Agreement a written notice of intent to
demand the fair value of the shares owned by such shareholder. The notice from
Kelly Russell must contain:
(1) The address to which a demand for payment and certificates of
certified shares must be sent in order to obtain payment and the date by
which they must be received;
(2) Any restrictions on transfer of uncertified shares that will apply
after the demand for payment is received;
(3) A form to be used to certify the date on which the shareholder, or
the beneficial owner on whose behalf the shareholder dissents, acquired the
shares or an interest in them and to demand payment; and
(4) A copy of sections 302A.471 and 302A.473 of the MBCA and a brief
description of the procedures to be followed under such sections.
In order to receive the fair market value of the shares, a dissenting
shareholder must demand payment and deposit certificated shares or comply with
any restrictions on transfer of uncertificated shares within 30 days after the
notice was given, but the dissenter retains all other rights of a shareholder
until the KRSI Merger takes effect.
A shareholder may not assert dissenters' rights as to less than all of the
shares registered in the name of the shareholder, unless the shareholder
dissents with respect to all the shares that are beneficially owned by another
person but registered in the name of the shareholder and discloses the name and
address of each beneficial owner on whose behalf the shareholder dissents. In
that event, the rights of the dissenter will be determined as if the shares as
to which the shareholder has dissented and the other shares were registered in
the names of different shareholders.
A beneficial owner of shares who is not the shareholder may assert
dissenters' rights with respect to shares held on behalf of such beneficial
owner, and will be treated as a dissenting shareholder under the terms of
sections 302A.471 and 302A.473 of the MBCA, if the beneficial owner submits
written consent of the shareholder holding such beneficial owner's shares to
Kelly Russell at the time of or before the assertion of the rights.
PROCEDURES FOLLOWING AN ASSERTION OF DISSENTERS' RIGHTS
After the KRSI Merger takes effect, or after Kelly Russell receives a valid
demand for payment, whichever is later, Kelly Russell must remit to each
dissenting shareholder who has not voted his or her shares in favor of the
proposed KRSI Merger and has filed with Kelly Russell before the vote on the
proposed KRSI Merger a written notice of intent to demand the fair value of the
shares owned by such shareholder, the amount Kelly Russell estimates to be the
fair value of the shares, plus interest ("interest" commences five days after
the Effective Time of the KRSI Merger up to and including the date of payment,
calculated at a rate provided under Minnesota law for interest on verdicts and
judgments), accompanied by:
(1) Kelly Russell's balance sheet and statement of operations for a
fiscal year ending not more than 16 months before the Effective Time of the
KRSI Merger, together with the latest available interim financial
statements;
(2) An estimate by Kelly Russell of the fair value of the shares and a
brief description of the procedures to be followed in demanding supplemental
payment.
(3) A copy of sections 302A.471 and 302A.473 of the MBCA, and a brief
description of the procedures to be followed in demanding supplemental
payment.
Kelly Russell may withhold the above-described remittance from a person who
was not a shareholder on the date the Merger Agreement was first announced to
the public or who is dissenting on behalf of a person who was not a beneficial
owner on that date. If such dissenter has not voted his or
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<PAGE>
her shares in favor of the proposed KRSI Merger and has filed with Kelly Russell
before the vote on the proposed Merger Agreement a written notice of intent to
demand the fair value of the shares owned by such shareholder, Kelly Russell
must forward to such dissenter the materials described in the preceding
paragraph, a statement of reason for withholding the remittance, and an offer to
pay to such dissenter the amount listed in the materials if the dissenter agrees
to accept that amount in full satisfaction. Such dissenter may decline the offer
and demand payment of such dissenter's own estimate of the fair value of the
shares, plus interest, by written notice to Kelly Russell. Failure to do so
entitles such dissenter only to the amount offered. If such dissenter makes
demand, the procedures, costs, fees and expenses described below for petitioning
the court shall apply.
If Kelly Russell fails to remit payment within 60 days of the deposit of
certificates or the imposition of transfer restrictions on uncertified shares,
it must return all deposited certificates and cancel all transfer restrictions.
However, Kelly Russell may require deposit or restrict transfer at a later time
and again give notice that contains:
(1) The address to which a demand for payment and certificates of
certified shares must be sent in order to obtain payment and the date by
which they must be received;
(2) Any restrictions on transfer of uncertificated shares that will
apply after the demand for payment is received;
(3) A form to be used to certify the date on which the shareholder, or
the beneficial owner on whose behalf the shareholder dissents, acquired the
shares or an interest in them and to demand payment; and
(4) A copy of sections 302A.471 and 302A.473 of the MBCA and a brief
description of the procedures to be followed under such sections.
If a dissenter believes that the amount remitted by Kelly Russell is less
than the fair value of the shares plus interest, the dissenter may give written
notice to Kelly Russell of the dissenter's own estimate of the fair value of
shares, plus interest, within 30 days after Kelly Russell mails the remittance,
and demand payment of the difference (a "Demand"). Otherwise, a dissenter is
entitled only to the amount remitted by Kelly Russell.
If Kelly Russell receives a Demand, it must, within 60 days after receiving
the Demand, either pay to the dissenter the amount demanded, or an amount agreed
to by the dissenter after discussion with Kelly Russell, or file in court a
petition requesting that the court determine the fair value of the shares, plus
interest. The petition must be filed in Hennepin County, Minnesota. The petition
must name as parties all dissenters who made a Demand and who have not reached
agreement with Kelly Russell. The jurisdiction of the court is plenary and
exclusive. The court may appoint appraisers, with powers and authorities the
court deems proper, to receive evidence on and recommend the amount of the fair
value of the shares. The court must determine whether the shareholder or
shareholders in question have fully complied with the requirements of section
302A.473 of the MBCA, and must determine the fair value of the shares, taking
into account any and all factors the court finds relevant, computed by any
method or combination of methods that the court, in its discretion, sees fit to
use, whether or not used by Kelly Russell or by a dissenter. The fair value of
the shares as determined by the court is binding on all shareholders, wherever
located. A dissenter is entitled to judgment for the amount by which the fair
value of the shares as determined by the court, plus interest, exceeds the
amount, if any, remitted by Kelly Russell, but shall not be liable to Kelly
Russell for the amount, if any, by which the amount, if any, remitted to the
dissenter exceeds the fair value of the shares as determined by the court, plus
interest.
The court must determine the costs and expenses of any appraisers of a
proceeding under the preceding paragraph, including the reasonable expenses and
compensation of any appraisers appointed by the court, and must assess those
costs and expenses against Kelly Russell, except that the court may assess part
or all of those costs and expenses against a dissenter whose Demand is found to
be arbitrary, vexatious, or not in good faith.
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If the court finds that Kelly Russell has failed to comply substantially
with section 302A.473 of the MBCA, the court may assess all fees and expenses of
any experts or attorneys as the court deems equitable. These fees and expenses
may also be assessed against a person who has acted arbitrarily, vexatiously, or
not in good faith in bringing the proceeding, and may be awarded to a party
injured by those actions.
The court may award, in its discretion, fees and expenses to an attorney for
the dissenters out of the amount awarded to the dissenters, if any.
MARKET PRICE OF AND DIVIDENDS ON OSP COMMON STOCK, GLOBAL
ONE COMMON STOCK AND KELLY RUSSELL COMMON STOCK
MARKET INFORMATION
OSP AND GLOBAL ONE
To date, there has been no trading in the OSP Common Stock or the Global One
Common Stock. Global One has filed an application to include the Global One
Common Stock on the Nasdaq SmallCap Market under the symbol "GOGO." However,
there can be no assurance that such application will be approved or that,
following this offering, an active trading market for the Global One Common
Stock will develop or be sustained. Miller, Johnson & Kuehn, Incorporated has
indicated its intention to make a market in the Global One Common Stock on the
Nasdaq Small Cap Market, effective upon approval of the Global One Common Stock
for quotation on the Nasdaq SmallCap Market. If and to the extent that MJK, or
another securities firm determines to make a market in the Global One Common
Stock, the market maker would be under no obligation to continue to make a
market and could discontinue such activity at any time. In the event Global
One's application is not approved, it is anticipated that the Global One Common
Stock will be quoted for trading on the OTC Bulletin Board or in the Pink Sheets
maintained by the National Quotation Bureau, Inc.
KELLY RUSSELL
From March 1994 to June 10, 1996, the Kelly Russell Common Stock was traded
in the over-the-counter market and quoted on the Nasdaq SmallCap Market under
the symbol "KRSI." Since June 10, 1996, Kelly Russell Common Stock has traded on
the OTC Bulletin Board. Prior to March 1994, there was no public market for
Kelly Russell Common Stock. The following table sets forth the high and low bid
prices of Kelly Russell Common Stock for the periods indicated. The Nasdaq bid
quotations represent interdealer prices, without retail mark-ups, mark-downs or
commissions, and may not necessarily represent actual transactions.
<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31, 1996 HIGH LOW
- ---------------------------------------- -------- --------
<S> <C> <C>
First Quarter........................... $ 4 1/8 $ 2 7/8
Second Quarter*......................... $ 2 3/4 $ 1 1/2
<CAPTION>
YEAR ENDED DECEMBER 31, 1995 HIGH LOW
- ---------------------------------------- -------- --------
<S> <C> <C>
First Quarter........................... $ 3 $ 2 1/4
Second Quarter.......................... 3 7/8 3
Third Quarter........................... 4 3 7/8
Fourth Quarter.......................... 4 3 7/8
<CAPTION>
YEAR ENDED DECEMBER 31, 1994 HIGH LOW
- ---------------------------------------- -------- --------
<S> <C> <C>
First Quarter (3/24/94 - 3/31/94)....... $ 4 1/2 $ 3 3/4
Second Quarter.......................... 5 4 1/4
Third Quarter........................... 5 1/4 4
Fourth Quarter.......................... 4 7/8 2 1/4
</TABLE>
On July 10, 1996, the closing bid for Kelly Russell Common Stock was $1.875
per share.
*Since June 10, 1996, Kelly Russell Common Stock has traded on the OTC Bulletin
Board.
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Management of Kelly Russell believes that the prices at which Kelly
Russell's Common Stock trades does not accurately reflect the fair value of
Kelly Russell's Common Stock. The volume of trading in Kelly Russell's Common
Stock in the public market is limited and is conducted largely by one market
maker, Miller Johnson & Kuehn, Incorporated ("MJK"). As a result, Kelly Russell
believes the market has been inefficient in arriving at an accurate value of
Kelly Russell's Common Stock. In support of management's belief, Kelly Russell
sold Units (consisting of one share of Kelly Russell Common Stock and one
warrant to acquire one share of Kelly Russell Common Stock at an exercise price
of $2.00 per share) in a private offering undertaken from December 1994 through
March 1995 at $1.00 per Unit, although the quoted market price for Kelly
Russell's Common Stock at that time, as reported by Nasdaq SmallCap Market,
ranged from a high of $4.00 to a low of $2.875 per share. It was the conclusion
of Kelly Russell's Board of Directors, in consultation with MJK, which acted as
agent in the private placement, that such pricing was necessary to raise the
financing needed for Kelly Russell, given the difficult financial circumstances
facing Kelly Russell.
SHAREHOLDERS
GLOBAL ONE
As of the date hereof, there are 2 shareholders of the Global One Common
Stock and the OSP Common Stock.
KELLY RUSSELL
At the Record Date there were 4,082,373 shares of Kelly Russell Common Stock
outstanding held by approximately 127 record holders. Based on information which
Kelly Russell has obtained from its Transfer Agent, there are approximately 630
shareholders of Kelly Russell Common Stock, whose stock is held either in
nominee name and/or street name brokerage accounts.
DIVIDENDS
OSP AND GLOBAL ONE
Prior to the OSP Merger, the Company has been taxed as an S Corporation
under the Internal Revenue Code of 1986, as amended, and has declared and paid
cash dividends on the OSP Common Stock. See "S Corporation Distributions." Prior
to the Closing, the Company expects to declare a cash dividend on its Common
Stock, in the aggregate amount of $1,750,000, to the S Corporation shareholders,
Joseph C. Angard and Michael A. Malm. Global One intends to pay this dividend
promptly following consummation of the KRSI Merger using some of the proceeds
from the Private Placement. In addition a portion of the proceeds of the Private
Placement will be used to pay an additional dividend of approximately $600,000
to permit the OSP Shareholders' to pay their respective tax liabilities incurred
as a result of OSP's operating results generated during 1995. See "The KRSI
Merger, the Reorganization and the Private Placement -- Conditions to
Consummation of the KRSI Merger and the Reorganization."
Except for the dividends payable as described in the preceding paragraph,
for the foreseeable future, Global One does not intend to pay any cash
dividends. Global One presently expects to retain its earnings, if any, to
finance the development and expansion of its business. The payment by Global One
of cash dividends, if any, on the Global One Common Stock in the future is
subject to the discretion of the Board of Directors.
Global One's ability to pay dividends is subject to restrictions set forth
in the Delaware General Corporation Law. The Delaware Corporation Law provides
that a Delaware corporation may pay dividends either (i) out of the
corporation's surplus (as defined in Delaware law), or (ii) if there is no
surplus, out of the corporation's net profits for the fiscal year in which the
dividend is declared and/or the preceding fiscal year.
Pursuant to Section 2115 of the California General Corporation Law (the
"California GCL"), under certain circumstances, certain provisions of the
California GCL may be applied to foreign corporations qualified to do business
in California notwithstanding the law of the jurisdiction where
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<PAGE>
the corporation is incorporated. Such corporations are referred to herein as
"QUASI-California" corporations. Global One will be qualified to do business in
the State of California. Section 2115 is applicable to foreign corporations
which have more than half of their shareholders residing in California and more
than half of their business deriving from California. Global One's Management
believes that more than half Global One's shareholders reside outside
California, and that Global One would therefore not be deemed to be a
QUASI-California corporation. If Global One were determined to be a
QUASI-California corporation, however, it would have to comply with California
law with respect to, among other things, distributions to shareholders. Under
the California GCL, a corporation is prohibited from paying dividends unless (i)
the retained earnings of the corporation immediately prior to the distribution
exceeds the amount of the distribution; (ii) the assets of the corporation
exceed 1 1/4 times its liabilities; or (iii) the current assets of the
corporation exceed its current liabilities, but if the average pre-tax net
earnings of the corporation before interest expense for the two years preceding
the distribution was less than the average interest expense of the corporation
for those years, the current assets of the corporation must exceed 1 1/4 times
its current liabilities.
KELLY RUSSELL
Kelly Russell has never paid or declared any cash dividends on the Kelly
Russell Common Stock and does not intend to pay dividends on the Kelly Russell
Common Stock prior to the Effective Time.
COMPARISON OF THE RIGHTS OF HOLDERS OF GLOBAL ONE
COMMON STOCK AND KELLY RUSSELL COMMON STOCK
Upon consummation of the KRSI Merger, holders of Kelly Russell Common Stock
will receive shares of Global One Common Stock. Set forth below is a summary of
(i) the material features of the Kelly Russell Common Stock and the Global One
Common Stock; and (ii) the material differences between the rights of the
holders of Kelly Russell Common Stock and the Global One Common Stock. These
summaries are qualified in their entirety by reference to the charter documents
and other instruments of Kelly Russell and Global One that create the rights of
the security holders.
GLOBAL ONE
Global One is authorized by its Certificate of Incorporation to issue
30,000,000 shares of Global One Common Stock and 20,000,000 shares of serial
preferred stock, $.01 par value. As of the date hereof, two shares of Global One
Common Stock were issued and outstanding and no shares of serial preferred stock
were issued or outstanding.
At the effective time of the OSP Merger, the outstanding shares of OSP
Common Stock held of record by the OSP Shareholders will be converted into
6,448,088 shares of Global One Common Stock, and the warrant to purchase shares
of OSP Common Stock currently outstanding will be converted into a warrant to
purchase 197,069 shares of Global One Common Stock for a price of $.01269 per
share.
Holders of Global One Common Stock will be entitled to one vote, in person
or by proxy, for each share of Global One Common Stock held of record in the
shareholder's name on the books of Global One as of the record date on any
matter submitted to the vote of the shareholders. Global One's Certificate of
Incorporation does not provide for cumulative voting in the election of
directors. Each share of Global One Common Stock has the same rights, privileges
and preferences as every other share and will share equally in the Global One's
net assets upon liquidation or dissolution. Global One Common Stock will have no
preemptive, conversion or redemption rights or sinking fund provisions and all
of the issued and outstanding shares of Global One Common Stock, when issued,
will be fully paid and nonassessable.
Upon consummation of the KRSI Merger, Global One will assume Kelly Russell's
rights and obligations under the Kelly Russell Stock Option Plan and each of the
outstanding options previously granted under the Kelly Russell Stock Option
Plan. As a result of this assumption, the optionee shall have the right to
purchase one share of Global One Common Stock for each two shares of Kelly
Russell
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Common Stock the optionee was entitled to purchase prior to the KRSI Merger. See
"The KRSI Merger, the Reorganization and the Private Placement -- Treatment of
Kelly Russell Options and Warrants."
The Board of Directors of Global One, without shareholder approval, may
authorize one or more classes of serial preferred stock with preferences or
voting rights that may adversely affect the rights of holders of the Global One
Common Stock. Although it is not possible to state the actual effect any
issuance of serial preferred stock might have upon the rights of holders of
Global One Common Stock, the issuance of serial preferred stock might (i)
restrict dividends on Global One Common Stock if preferred stock dividends have
not been paid; (ii) dilute the voting power and equity interest of holders of
Global One Common Stock to the extent that any preferred stock series has voting
rights or is convertible into Global One Common Stock; or (iii) prevent current
holders of Global One Common Stock from participating in Global One's assets
upon liquidation until any liquidation preferences granted to the holders of the
serial preferred stock are satisfied. In addition, the issuance of serial
preferred stock may, under certain circumstances, have the effect of
discouraging an attempt to change control of Global One by, for example,
creating voting impediments to the approval of the mergers or other similar
transactions involving Global One. Global One's Board of Directors does not
presently intend to issue any serial preferred stock.
Shareholders are entitled to dividends when, as and if declared by Global
One's Board of Directors out of funds legally available therefor (and after
satisfaction of the prior rights of holders of outstanding preferred stock, if
any), subject to certain restrictions on payment of dividends imposed by the
Delaware General Corporation Law. See "Comparison of the Rights of Holders of
Global One Common Stock and Kelly Russell Common Stock -- Dividends and
Repurchases of Stock."
Following consummation of the KRSI Merger, the transfer agent and registrar
for the Global One Common Stock will be Norwest Bank Minnesota, N.A.
KELLY RUSSELL
Kelly Russell's authorized capital stock consists of 10,000,000 shares of
Common Stock, $.01 par value, of which 4,082,373 shares of Common Stock are
currently outstanding. Holders of Kelly Russell Common Stock have no preemptive,
subscription, redemption or conversion rights. Cumulative voting for directors
is not permitted. The holders of the Kelly Russell Common Stock are entitled to
one vote per share on all matters submitted to a vote of shareholders. All
shares of Kelly Russell Common Stock are entitled to share equally in dividends
from sources legally available therefor, when, as and if declared by the Board
of Directors and, upon liquidation or dissolution of Kelly Russell whether
voluntary or involuntary, to share equally in the assets of Kelly Russell
available for distribution to shareholders. Kelly Russell has never paid a cash
dividend on the Kelly Russell Common Stock and does not intend to pay dividends
in the foreseeable future. Kelly Russell's present intention is to retain all
future earnings for use in its business. All shares of Kelly Russell Common
Stock presently outstanding are fully paid and nonassessable. The Board of
Directors is authorized to issue additional shares of Kelly Russell Common
Stock, but not to exceed the amount authorized by the Articles of Incorporation,
and to issue options and warrants for the purchase of such shares, on such terms
and conditions and for such consideration as the Board may deem appropriate
without further shareholder action.
The transfer agent and registrar for the Kelly Russell Common Stock is
Norwest Bank Minnesota, N.A.
COMPARISON OF KELLY RUSSELL COMMON STOCK AND GLOBAL ONE COMMON STOCK
As a result of the KRSI Merger, holders of Kelly Russell Common Stock will
become holders of Global One Common Stock. Such persons will have different
rights as shareholders of Global One than they had as shareholders of Kelly
Russell. These differences are due to (i) differences in the
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respective charters and by-laws of Kelly Russell and Global One and (ii)
differences between the corporate laws of Delaware, where Global One is
incorporated and by whose laws it is governed, and the corporate laws of
Minnesota, where Kelly Russell is incorporated and by whose laws it is governed.
The following is a summary of certain significant differences between the
charter documents of Kelly Russell and Global One and between the laws of
Minnesota and Delaware. This summary is complete in all material respects.
MEETINGS OF SHAREHOLDERS
Minnesota law provides that meetings of shareholders may be called by: (i)
the chief executive officer; (ii) the chief financial officer; (iii) two or more
directors; (iv) shareholders holding 10% or more of the voting power of all
shares entitled to vote (except that the voting power needed to demand a meeting
to directly or indirectly effect a business combination is 25%); or (v) any
other person authorized in the articles or by-laws. The Kelly Russell By-laws
provide that meetings of shareholders may be called only by the parties listed
in items (i) through (iv) above. Delaware law provides that meetings of
shareholders may be called only by the directors or by any other person as may
be authorized by the corporation's certificate of incorporation or by-laws. The
Global One certificate and By-laws provide that special meetings of shareholders
may be called only by a majority of Global One's Board of Directors, the
Chairman, Vice-Chairman or President. No other person shall be entitled to call
special meetings.
ACTION WITHOUT MEETINGS OF SHAREHOLDERS
Global One's Bylaws provide that any action that may be taken at an annual
or special meeting of the shareholders may be taken without a meeting by the
consent of shareholders holding at least the number of shares as would be
required to approve such action at an annual or special meeting, provided that
notice of such action is given to shareholders who have not voted upon the
matter. Global One's two largest shareholders, Joseph C. Angard and Michael A.
Malm, will beneficially own, in the aggregate, approximately 50% of the Global
One Common Stock outstanding immediately after the Effective Time of the KRSI
Merger through trusts that will be established by Mr. Angard and Mr. Malm,
respectively. It is anticipated that the trusts will enter into an agreement
pursuant to which the trustee of Mr. Angard's trust will be given a proxy
entitling Mr. Angard's trust to vote all of the shares owned by Mr. Malm's
trust. Under Delaware law, except as otherwise provided in a corporation's
certificate of incorporation or bylaws, corporate action requiring shareholder
approval may be taken upon the vote of a majority of the shares outstanding.
Therefore, the OSP Shareholders will have the ability to approve most corporate
actions without the necessity of a shareholder meeting.
DIVIDENDS AND REPURCHASES OF STOCK
The Kelly Russell Board of Directors, under Minnesota law, may declare
dividends without shareholder approval so long as the corporation will be able
to pay its debts in the ordinary course of business after making the
distribution. Delaware law permits a corporation, in general, to declare and pay
dividends out of surplus or out of net profits for the current and/or preceding
fiscal year, and, in general, to redeem or repurchase shares of its stock if the
capital of the corporation is not impaired and such redemption or repurchase
will not impair the capital of the corporation. The directors of a Delaware
corporation may be jointly and severally liable to the corporation for a willful
or negligent violation of such provisions of Delaware law.
INSPECTION RIGHTS
Under Minnesota law, a shareholder has an "absolute right," upon written
demand, to examine the following corporate documents: (i) the share register;
(ii) records of all proceedings of shareholders for the last three years; (iii)
records of all proceedings of the board for the last three years; (iv) the
corporation's articles and all amendments currently in effect; (v) the
corporation's bylaws and all amendments currently in effect; (vi) certain
financial statements and the financial statement for the most recent interim
period prepared in the course of the operation of the corporation for
distribution to the shareholders or to a governmental agency as a matter of
public record; (vii) reports made to
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shareholders generally within the last three years; (viii) a statement of the
names and usual business addresses of its directors and principal officers; (ix)
voting trust agreements; (x) shareholder control agreements; and (xi) a copy of
agreements, contracts, or other arrangements or portions of them fixing the
rights of a class or series of securities issued by the company. Under Delaware
law, shareholders, upon the demonstration of a proper purpose, have the right to
inspect a corporation's stock ledger, shareholder list, and other books and
records.
AMENDMENTS TO CHARTER
Minnesota law provides that the Kelly Russell Articles may be amended by the
holders of a majority of the voting power of the shares present at a meeting of
shareholders, unless a greater proportion is required by such Articles. The
Kelly Russell Articles do not require a greater proportion. Under Delaware law,
charter amendments require the approval of the directors and the vote of the
holders of a majority of the outstanding stock and a majority of each class of
stock outstanding and entitled to vote thereon as a class, unless the
certificate of incorporation requires a greater proportion. The Global One
Certificate provides that approval of the majority of the voting power present
at a meeting of shareholders is required to amend the Global One Certificate.
AMENDMENT OF BY-LAWS
Minnesota law provides that the Kelly Russell By-laws may be amended by the
holders of a majority of the voting power of the shares present at a meeting of
shareholders, unless a greater proportion is specified. The Kelly Russell
By-laws provide that such By-laws may be amended by the Kelly Russell Board,
subject to the power of Kelly Russell shareholders to change or repeal such
By-laws. The Kelly Russell By-laws provide that the Kelly Russell Board shall
not make or alter any By-Laws fixing a quorum for meetings of shareholders,
prescribing procedures for removing directors or filling vacancies on the Kelly
Russell Board, or fixing the number of directors or their classifications,
qualifications or terms of office. Under Delaware law, the power to adopt, amend
or repeal by-laws lies in shareholders entitled to vote; provided, however, that
any corporation may, in its certificate of incorporation, confer the power to
adopt, amend or repeal by-laws upon the directors. The Global One By-laws
provide that the Global One Board has the power to amend the Global One By-laws,
and that Global One shareholders may not amend the Global One By-laws except
upon the affirmative vote of a majority of the holders of record of shares of
voting stock entitled to be cast by the holders of all of the then outstanding
shares of voting stock.
PREEMPTIVE RIGHTS
The Kelly Russell Articles and the Global One Certificate deny preemptive
rights to shareholders of Kelly Russell and Global One, respectively.
DIRECTORS
Under Minnesota law and the governing documents of Kelly Russell, directors
hold office until the next annual meeting of shareholders of the election and
qualification of their successors.
The Global One By-laws provide that the Global One Board shall consist of
not less than one nor more than nine members and that such number shall be
determined initially by the Incorporator and thereafter by the Global One Board.
Global One's certificate provides that the directors shall be divided into three
classes, the members of each class to serve for a term of three years. One class
will serve until the First Annual Meeting of Shareholders (Class I); one class
will serve until the Second Annual Meeting of Shareholders (Class II); and one
class will serve until the Third Annual Meeting of Shareholders (Class III), and
in all cases, until their respective successors are duly elected and qualified.
The Global One By-laws provide that any increase or decrease in the number
of directors, whether instituted by the directors or by the shareholders at an
annual meeting, be apportioned among the classes so as to maintain, as nearly as
possible, an equal number of directors in each class. A vacancy on the Global
One Board requires the majority vote of the remaining directors to fill such
vacancy.
43
<PAGE>
The Global One Certificate and By-law provisions with respect to the Global
One Board were designed to ensure continuity of the Global One Board to promote
the long-term goals of and orderly changes in control of the Global One Board.
These provisions could, however, operate to discourage or prevent takeovers,
including mergers, tender offers or proxy contests, or changes in management of
Global One which are proposed to be effected without approval of the Global One
Board, whether or not such takeover or change in control are detrimental to
Global One or its shareholders. The Global One By-law provisions could delay
shareholders who are not in agreement with the policies of the Global One Board
from removing a majority of the Global One Board for two years, unless such
shareholders could show cause to justify such removal.
PERSONAL LIABILITY OF DIRECTORS
Article Eleventh of the Global One Certificate, in conjunction with Delaware
law, will limit or eliminate a director's personal liability to the corporation
or its shareholders for breach of fiduciary duty. Such provision will not,
however, limit or eliminate a director's monetary liability for: (i) a breach of
the director's duty of loyalty; (ii) acts or omissions not in good faith or that
involve intentional misconduct or a knowing violation of law; (iii) under
Section 174 of the Delaware GCL, as the same exists or hereafter may be amended,
or; (iv) any transaction from which the director derived an improper personal
benefit. Minnesota law generally permits a Minnesota corporation's articles to
eliminate or limit a director's personal liability to the corporation or its
shareholders for monetary damages for breaches of a director's duty as a
director. However, the articles cannot deprive the corporation or its
shareholders of the right to enjoin transactions which violate a director's duty
of care. Moreover, the articles cannot limit liability for any breach of the
director's duty of loyalty, for transactions resulting in an improper personal
benefit to the director or for acts or omissions not in good faith or that
involve intentional misconduct or a knowing violation of law. In addition,
liability for illegal dividends, stock repurchases or other distributions to
shareholders or for violations of Minnesota's securities statutes cannot be
limited. The Kelly Russell By-laws provide that Kelly Russell shall indemnify
directors to the extent permitted under Minnesota law.
INDEMNIFICATION
Article 7 of the Kelly Russell By-laws provides for mandatory
indemnification of directors, officers, employees and agents of Kelly Russell to
the full extent permitted by Minnesota law. Minnesota law provides for mandatory
indemnification of a person acting in an official capacity on behalf of the
corporation (including a director, officer, employee or agent) if such person
acted in good faith, received no improper personal benefit, acted in a manner he
reasonably believed to be in or not opposed to the best interests of the
corporation and, in the case of a criminal proceeding, had no reasonable cause
to believe his conduct was unlawful.
Delaware law permits, but does not require, a corporation to indemnify
officers, directors, employees or agents and expressly provides that the
indemnification provided for under Delaware law shall not be deemed exclusive of
any indemnification right under any by-law, vote of shareholders or
disinterested directors, or otherwise. Delaware law permits indemnification
against expenses and certain other liabilities arising out of legal actions
brought or threatened against such persons for their conduct on behalf of Global
One, provided that each such person acted in good faith and in a manner that he
reasonably believed was in or not opposed to Global One's best interests and in
the case of a criminal proceeding, had no reasonable cause to believe his
conduct was unlawful. Delaware law does not allow indemnification of directors
in the case of an action by or in the right of Global One (including shareholder
derivative suits) unless the directors successfully defend the action or
indemnification is ordered by the court.
Global One's By-laws provide for mandatory indemnification of each person
who is or was a director, officer, employee or agent of the corporation, or is
or was serving at the request of the corporation as a director, officer,
employee or agent of another corporation or other entity to the full extent
permitted by the Delaware GCL. In addition, Global One intends to enter into
indemnification agreements with its officers and directors.
44
<PAGE>
However, insofar as indemnification for liabilities arising under the
Securities Act may be permitted to directors, officers and controlling persons
of Kelly Russell and Global One, Kelly Russell and Global One have been advised
that in the opinion of the SEC, such indemnification is against public policy as
expressed in the 1933 Act and is, therefore, unenforceable.
CONTROL SHARE ACQUISITIONS
Kelly Russell is subject to the Minnesota Control Share Acquisition Act
("MCSAA"). The MCSAA provides that any person (an "acquiring person") proposing
to make a "control share acquisition" must disclose certain information to the
target corporation and the target corporation's shareholders must thereafter
approve the control share acquisition or certain of the shares acquired in the
control share acquisition shall not have voting rights and shall be subject to
redemption by the target corporation for a specified period of time at the
market value of such shares. A "control share acquisition" is an acquisition of
shares of an issuing public corporation which results in the acquiring person
having voting power that exceeds one of the following thresholds: (i) at least
20 percent but less than 33 1/3 percent; (ii) at least 33 1/3 percent but less
than or equal to 50 percent; and (iii) over 50 percent. The definition of a
"control shares acquisition" specifically excludes acquisition of shares from
the corporation issuing such shares, and acquisitions pursuant to plans of
merger or exchange which are approved by the shareholders of the corporation.
The MCSAA applies to a control share acquisition with respect to an issuing
public corporation unless otherwise expressly provided in the issuing public
corporation's articles of incorporation or in by-laws approved by the
shareholders. The Kelly Russell Articles do not provide that the MCSAA will not
apply to Kelly Russell. There are no provisions of Delaware law which are
analogous to the MCSAA.
BUSINESS COMBINATIONS
The MBCA provides that Kelly Russell may not engage in any "business
combination" with any "interested shareholder" or affiliate or associate of an
interested shareholder for a period of four years after the interested
shareholder's "share acquisition date" unless either the business combination or
the acquisition of shares by the interested shareholder on his share acquisition
date is approved by a disinterested committee of the Kelly Russell Board before
such interested shareholder's share acquisition date. The Delaware Business
Combination Act ("DBCA") restricts publicly-held corporations from engaging in
any "business combination" with any "interested shareholder" or affiliate or
associate of an "interested shareholder" for a period of three years, after the
date on which such person becomes an "interested shareholder" unless (i) prior
to such date the board of directors approved the "business combination" or
transaction making the shareholder "interested," or (ii) upon consummation of
such transaction the "interested shareholder" owned at least 85% of the
outstanding voting stock, or (iii) the "business combination" is approved by the
board and by the two-thirds vote of the shares (exclusive of the shares held by
the "interested shareholder") at a meeting.
For purposes of the MBCA, an "interested shareholder" is a 10% or more
beneficial owner of voting shares of such corporation, or a person who is an
associate and an affiliate of the corporation and who at any time within the
four year period preceding the date in question was a 10% or more beneficial
owner of voting shares of such corporation. An "interested shareholder" under
the DBCA is the beneficial owner of 15% or more of the outstanding voting stock
or was at any time within the preceding three years such a holder.
The MBCA and DBCA apply to any business combination of a corporation with
any interested shareholder unless otherwise expressly provided in such
corporation's articles of incorporation or by-laws, or other restrictions on
applicability exist as set forth in the DBCA. Neither the Articles or
Certificate nor the By-laws of Kelly Russell or Global One provide that such
corporation will not be subject to the MBCA or the DBCA, respectively.
RIGHTS OF DISSENTING SHAREHOLDERS
Under Section 302A.473 of the MBCA, if a corporation calls a shareholder
meeting to approve a merger to which such corporation is a party, the sale of
substantially all of the assets of the corporation, or in certain other
circumstances, the notice of the meeting must inform each shareholder of the
45
<PAGE>
right to dissent from such action and must include a copy of section 302A.471
and section 302A.473 of the MBCA and a brief description of the procedure to be
followed under such sections. A shareholder who wishes to exercise dissenters'
rights in such circumstances is entitled to demand the fair value of the shares
owned by such shareholder.
Under Delaware law, shareholders have the right, in some circumstances, to
dissent from mergers and consolidations by demanding payment in cash for their
shares equal to the fair value (excluding any appreciation or depreciation as a
consequence or in expectation of the transaction), as determined by agreement
with the corporations or by an independent appraiser appointed by a court in an
action timely brought by the dissenters. No appraisal rights exist, however, for
shares listed on a national securities exchange or held of record by more than
2,000 shareholders unless the certificate of incorporation provides otherwise or
the shareholders receive anything other than: (i) shares of stock of the
corporation surviving or resulting from such merger or consolidation; (ii)
shares of stock of any other corporation which at the effective date of the
merger or consolidation will be either listed on a national securities exchange
or held of record by more than 2,000 shareholders; (iii) cash in lieu of
fractional shares of the corporation described in the foregoing clauses (i) and
(ii); or (iv) any combination of (i), (ii) or (iii).
UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS
The following unaudited pro forma condensed combined financial information
gives effect to the Transactions as if it had occurred as of January 1, 1995 for
the unaudited pro forma condensed combined statement of operations and other
financial data and as of March 31, 1996 for purposes of the unaudited pro forma
condensed combined balance sheet data.
The Unaudited Pro Forma Condensed Combined Financial Statements do not
purport to present the actual financial position or results of operations of
Global One had the transactions and events assumed therein in fact occurred on
the dates specified, nor are they necessarily indicative of the results of
operations that may be achieved in the future. The Unaudited Pro Forma Condensed
Combined Financial Statements are based on certain assumptions and adjustments
described in the notes to the Unaudited Pro Forma Condensed Combined Financial
Statements and should be read in conjunction therewith and with "The KRSI
Merger, the Reorganization and the Private Placement," "Management's Discussion
and Analysis of Financial Condition and Results of Operations of The Company"
and "Kelly Russell Studios, Inc. Management's Discussion and Analysis of
Financial Condition and Results of Operations" and the Consolidated Financial
Statements of The Company and Kelly Russell and the related notes thereto
included elsewhere in this Proxy Statement/ Prospectus.
Unaudited pro forma condensed combined financial information reflecting the
Transactions is provided below using the purchase method of accounting.
46
<PAGE>
GLOBAL ONE DISTRIBUTION & MERCHANDISING INC.
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 1996
(IN THOUSANDS, EXCEPT PER SHARE DATA)
The following Unaudited Pro Forma Condensed Combined Statements of
Operations set forth continuing operations of the Company for the three months
ended March 31, 1996, as if the Transactions had occurred as of January 1, 1995.
The Unaudited Pro Forma Condensed Combined Statements of Operations would not
necessarily reflect the results of operations that would have been attained if
the Transactions had been consummated at the beginning of the year presented.
The following Unaudited Pro Forma Condensed Combined Statements of Operations do
not reflect cost savings that may result from the Transactions.
<TABLE>
<CAPTION>
HISTORICAL
HISTORICAL KELLY PRO FORMA PRO FORMA
COMPANY RUSSELL ADJUSTMENTS COMBINED
----------- ------------ ------------- -----------
<S> <C> <C> <C> <C>
NET SALES..................................................... $ 8,941 $ 779 $ $ 9,720
COST OF SALES................................................. 5,270 453 5,723
----------- ------------ --- -----------
GROSS PROFIT.................................................. 3,671 326 0 3,997
OPERATING EXPENSES:
Warehouse and selling....................................... 2,352 2,352
General and administrative.................................. 1,453 709 88(1) 2,250
----------- ------------ --- -----------
Total operating expenses.................................. 3,805 709 88 4,602
----------- ------------ --- -----------
OPERATING LOSS................................................ (134) (383) (88) (605)
INTEREST EXPENSE.............................................. 267 2 269
----------- ------------ --- -----------
LOSS BEFORE INCOME TAXES AND MINORITY INTEREST................ (401) (385) (88) (874)
INCOME TAX PROVISION.......................................... 67 67
----------- ------------ --- -----------
LOSS BEFORE MINORITY INTEREST................................. (468) (385) (88) (941)
MINORITY INTEREST............................................. 46 46
----------- ------------ --- -----------
NET LOSS...................................................... $ (514) $ (385) $ (88) $ (987)
----------- ------------ --- -----------
----------- ------------ --- -----------
</TABLE>
<TABLE>
<S> <C>
PRO FORMA NET LOSS DATA:
Loss before income taxes and minority interest................................. $ (874)
Pro forma benefit for income taxes............................................. (85)(3)
Minority interest.............................................................. 46
------------
Pro forma net loss............................................................. $ (835)
------------
------------
PRO FORMA NET LOSS PER SHARE:
Pro forma net loss............................................................. $ (0.06)
------------
------------
Pro forma weighted average shares outstanding.................................. 12,994(2)
------------
------------
</TABLE>
See accompanying notes to Unaudited Pro Forma Condensed Combined Financial
Statements.
47
<PAGE>
GLOBAL ONE DISTRIBUTION & MERCHANDISING INC.
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 1995
(IN THOUSANDS, EXCEPT PER SHARE DATA)
The following Unaudited Pro Forma Condensed Combined Statements of
Operations set forth continuing operations of the Company for the year ended
December 31, 1995, as if the Transactions had occurred as of January 1, 1995.
The Unaudited Pro Forma Condensed Combined Statements of Operations would not
necessarily reflect the results of operations that would have been attained if
the Transactions had been consummated at the beginning of the year presented.
The following Unaudited Pro Forma Condensed Combined Statements of Operations do
not reflect cost savings that may result from the Transactions.
<TABLE>
<CAPTION>
HISTORICAL
HISTORICAL KELLY PRO FORMA PRO FORMA
COMPANY RUSSELL ADJUSTMENTS COMBINED
--------- ------------ ------------- -----------
<S> <C> <C> <C> <C>
NET SALES..................................................... $ 38,228 $ 2,814 $ $ 41,042
COST OF SALES................................................. 21,647 2,553 24,200
--------- ------------ ------ -----------
GROSS PROFIT.................................................. 16,581 261 0 16,842
OPERATING EXPENSES:
Warehouse and selling....................................... 10,201 10,201
General and administrative.................................. 4,971 2,134 294(1) 7,399
--------- ------------ ------ -----------
Total operating expenses.................................. 15,172 2,134 294 17,600
--------- ------------ ------ -----------
OPERATING INCOME (LOSS)....................................... 1,409 (1,873) (294) (758)
--------- ------------ ------ -----------
OTHER (INCOME) EXPENSE:
Other Income................................................ (40) (40)
Interest Expense............................................ 841 7 848
--------- ------------ ------ -----------
INCOME (LOSS) BEFORE INCOME TAXES, MINORITY INTEREST AND
EXTRAORDINARY ITEM........................................... 568 (1,840) (294) (1,566)
INCOME TAX BENEFIT............................................ (77) (77)
--------- ------------ ------ -----------
INCOME (LOSS) BEFORE MINORITY INTEREST AND EXTRAORDINARY
ITEM......................................................... 645 (1,840) (294) (1,489)
MINORITY INTEREST............................................. 243 243
--------- ------------ ------ -----------
INCOME (LOSS) BEFORE EXTRAORDINARY ITEM....................... $ 402 $ (1,840) $ (294) $ (1,732)
--------- ------------ ------ -----------
--------- ------------ ------ -----------
</TABLE>
<TABLE>
<S> <C>
PRO FORMA NET LOSS DATA:
Loss before income taxes, minority interest and extraordinary item............. $ (1,566)
Pro forma provision for income taxes........................................... 114(3)
Minority interest.............................................................. 243
------------
Pro forma net loss before extraordinary item................................... $ (1,923)
------------
------------
PRO FORMA NET LOSS PER SHARE:
Pro forma net loss before extraordinary item................................... $ (0.15)
------------
------------
Pro forma weighted average shares outstanding.................................. 12,994(2)
------------
------------
</TABLE>
See accompanying notes to Unaudited Pro Forma Condensed Combined Financial
Statements.
48
<PAGE>
GLOBAL ONE DISTRIBUTION & MERCHANDISING INC.
UNAUDITED COMPARATIVE PER SHARE DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
The following summary of comparative per share data sets forth certain
historical information for the Company and Kelly Russell, certain pro forma
information for Global One after giving effect to the KRSI Merger as a purchase
for accounting purposes, as if the KRSI Merger had been consummated at January
1, 1995 and equivalent pro forma information for Kelly Russell based on the pro
forma Global One information. No cash dividends were paid during the periods
presented.
<TABLE>
<CAPTION>
YEAR ENDED THREE MONTHS ENDED
DECEMBER 31, 1995 MARCH 31, 1996
----------------- ------------------
<S> <C> <C>
HISTORICAL:
OSP
Net income (loss) (3)...................... $ 0.06 $ (0.05)
Weighted average shares outstanding........ 8,037 8,037
Period-end book value (4).................. $ (0.16) $ (0.23)
Period-end shares outstanding.............. 6,448 6,448
Kelly Russell
Net loss before extraordinary item......... $ (0.52) $ (0.09)
Weighted average shares outstanding........ 3,541 4,082
Period-end book value (4).................. $ 0.25 $ 0.16
Period-end shares outstanding.............. 4,082 4,082
PRO FORMA COMBINED (5):
Global One
Net loss before extraordinary item......... $ (0.15) $ (0.06)
Weighted average shares outstanding........ 12,994 12,994
Period-end book value (4).................. $ 0.45 $ 0.41
Period-end shares outstanding.............. 12,994 12,994
Pro forma combined
Equivalent Kelly Russell share (6)
Net loss before extraordinary item....... $ (0.07) $ (0.03)
Period-end book value (4)................ $ 0.23 $ 0.20
</TABLE>
See accompanying notes to Unaudited Pro Forma Condensed Combined Financial
Statements.
49
<PAGE>
GLOBAL ONE DISTRIBUTION & MERCHANDISING INC.
UNAUDITED PRO FORMA CONDENSED COMBINED BALANCE SHEET
AS OF MARCH 31, 1996
(IN THOUSANDS, EXCEPT PER SHARE DATA)
The following Unaudited Pro Forma Condensed Combined Balance Sheet sets
forth historical balance sheet information for the Company and Kelly Russell at
March 31, 1996.
ASSETS
<TABLE>
<CAPTION>
AT MARCH 31, 1996
-------------------------------------------------------
HISTORICAL
HISTORICAL KELLY PRO FORMA PRO FORMA
COMPANY RUSSELL ADJUSTMENTS COMBINED
--------- ------------ ----------------- -----------
<S> <C> <C> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents.............................. $ 378 $ 38 $ 1,831(7) $ 2,247
Accounts receivable -- trade, net of allowance for
doubtful accounts..................................... 5,958 514 6,472
Inventories............................................ 4,992 276 5,268
Prepaid royalty advances............................... 716 133 849
Prepaid expenses and other current assets.............. 366 158 524
Deferred income tax asset.............................. 38 795(8) 833
--------- ------------ ------- -----------
Total current assets............................... 12,448 1,119 2,626 16,193
PROPERTY AND EQUIPMENT, Net.............................. 1,184 278 1,462
GOODWILL, Net............................................ 141 3,523(9) 3,664
DEPOSITS................................................. 160 160
--------- ------------ ------- -----------
TOTAL.................................................... $ 13,933 $ 1,397 $ 6,149 $ 21,479
--------- ------------ ------- -----------
--------- ------------ ------- -----------
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable....................................... $ 4,253 $ 541 $ 4,794
Accrued expenses....................................... 1,211 168 1,379
Royalties payable...................................... 2,059 49 2,108
Due to customers....................................... 205 205
Income taxes payable................................... 300 300
Current maturities of:
Capitalized lease obligations........................ 85 85
Subordinated long-term debt.......................... 1,050 (375)(7) 675
--------- ------------ ------- -----------
Total current liabilities.......................... 9,163 758 (375) 9,546
--------- ------------ ------- -----------
REVOLVING LINE OF CREDIT................................. 4,022 4,022
CAPITALIZED LEASE OBLIGATIONS............................ 129 129
SUBORDINATED LONG-TERM DEBT.............................. 1,857 1,857
MINORITY INTEREST........................................ 615 615
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY (DEFICIENCY):
Common stock........................................... 1,263 41 24(10)(7) 1,328
Additional paid-in capital............................. 112 8,133 520(11)(7) 8,765
Accumulated deficit.................................... (3,228) (7,535) 5,980(8) (4,783)
--------- ------------ ------- -----------
Total shareholders' equity (deficiency)............ (1,853) 639 6,524 5,310
--------- ------------ ------- -----------
TOTAL.................................................... $ 13,933 $ 1,397 $ 6,149 $ 21,479
--------- ------------ ------- -----------
--------- ------------ ------- -----------
</TABLE>
See accompanying notes to Unaudited Pro Forma Condensed Combined Financial
Statements.
50
<PAGE>
NOTES TO UNAUDITED PRO FORMA
CONDENSED COMBINED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE DATA)
(1) Represents the amortization of the excess of purchase price over net assets
acquired assuming a ten year life.
(2) Assumes for all periods presented the issuance of 2,041,187 shares of Global
One Common Stock to effect the KRSI Merger, as well as 4,504,234 shares
deemed to be sold in the Private Placement.
(3) Assumes pro forma treatment of income taxes for OSP being treated as a C
Corporation. See Note 10 to OSP's audited consolidated financial statements.
(4) Based on the actual or pro forma number of shares outstanding at the end of
the respective period.
(5) Assumes a Conversion Ratio of 0.5 shares of Global One Common Stock for each
share of Kelly Russell Common Stock as well as application of the net
proceeds from completion of the Transactions.
(6) Represents the pro forma equivalent of one share of Kelly Russell Common
Stock calculated by multiplying pro forma Global One data by the assumed
Conversion Ratio of 0.5 shares of Global One Common Stock for each share of
Kelly Russell Common Stock.
(7) The proceeds from the Private Placement will be used as follows:
<TABLE>
<S> <C>
Proceeds from issuance of common stock............................. $ 6,756
Less Transaction costs............................................. 2,200
---------
4,556
Payment of S Corporation distribution.............................. 1,750
Estimated dividend to the OSP Shareholders for actual tax
liabilities....................................................... 600
Repayment of subordinated debt..................................... 375
---------
Cash for working capital........................................... $ 1,831
---------
---------
</TABLE>
(8) Reflects the following:
<TABLE>
<S> <C>
Declaration of a dividend payable to the OSP Shareholders.......... $ (1,750)
Estimated dividend to the OSP Shareholders for actual tax
liabilities....................................................... (600)
Recognition of OSP deferred income tax assets from change to C
Corporation....................................................... 795
Elimination of Kelly Russell accumulated deficit................... 7,535
---------
$ 5,980
---------
---------
</TABLE>
(9) The acquisition of Kelly Russell will be accounted for as a purchase,
applying the provisions of Accounting Principles Board Opinion No. 16. The
total purchase cost will be allocated to Kelly Russell's assets and
liabilities based on their relative fair values as of the Effective Time of
the KRSI Merger, based on valuations and other studies that are not yet
complete. Accordingly, the excess of the purchase cost over the historical
book value of the net assets acquired has not yet been fully allocated to
the individual assets and liabilities acquired. Management believes there
51
<PAGE>
NOTES TO UNAUDITED PRO FORMA
CONDENSED COMBINED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE DATA)
will be no significant change in the allocation of the purchase price once
the final analysis is completed. Therefore, the excess purchase cost over
the net assets acquired has been allocated to goodwill.
<TABLE>
<S> <C>
Purchase cost of equity............................................ $ 3,062
Plus OSP's portion of costs associated with the Merger............. 535
Less book value of net assets acquired at March 31, 1996, net of
KRSI's portion of costs associated with the Merger of $565........ 74
---------
Cost in excess of net assets acquired.............................. $ 3,523
---------
---------
</TABLE>
Merger and Offering costs consist principally of legal and accounting fees
for KRSI and OSP, printing costs and investment banking costs. These costs
have been allocated between the cost of new equity, acquisition of KRSI and
KRSI's costs of selling its business which will be expensed by KRSI.
(10) Reflects the following:
<TABLE>
<S> <C>
Common Stock issued to effect the KRSI Merger........................ $ 20
Common Stock issued in the Private Placement......................... 45
Elimination of Kelly Russell Common Stock............................ (41)
---
$ 24
---
---
</TABLE>
(11) Reflects the following:
<TABLE>
<S> <C>
Common Stock issued to effect the KRSI Merger...................... $ 3,042
Common Stock issued in the Private Placement....................... 6,711
Transaction costs associated with the KRSI Merger, the
Reorganization and the Private Placement.......................... (1,100)
Elimination of Kelly Russell additional paid-in capital............ (8,133)
---------
$ 520
---------
---------
</TABLE>
52
<PAGE>
S CORPORATION DISTRIBUTIONS
The Company has been taxed as an S Corporation under the Internal Revenue
Code of 1986, as amended, since 1989. As a result of the Company being an S
Corporation, the taxable income of the Company generally has been taxed, for
federal and state income purposes, directly to the OSP Shareholders rather than
to the Company. The State of California imposes a corporate level state tax on S
corporations at the reduced rate of 1.5%. The Company makes a distribution to
the OSP Shareholders to pay shareholder level taxes, and the amount to be
distributed to pay such taxes for 1995 is anticipated to be approximately
$600,000. Such dividend is expected to be paid following the Closing from the
proceeds of the Private Placement.
The Company has paid distributions in the past and a portion has been
reinvested through the purchase of additional shares of OSP Common Stock by the
OSP Shareholders. The Company has declared a final distribution to the OSP
Shareholders in the amount of $1,750,000 which is to be paid from the proceeds
of the Private Placement following the Closing. This distribution is expected to
be in excess of the undistributed cumulative income that has been taxed or will
be taxable to the shareholders.
CAPITALIZATION
The following table sets forth the capitalization of the Company as of March
31, 1996, and of Global One, pro forma to give effect to the consummation of the
KRSI Merger and pro forma as adjusted to give pro forma effect to the
consummation of the Transactions (in thousands).
<TABLE>
<CAPTION>
AS OF MARCH 31, 1996
------------------------
PRO FORMA AS
ACTUAL ADJUSTED
--------- -------------
<S> <C> <C>
Subordinated debt...................................................................... $ 1,050 $ 675(1)
Capitalized leases..................................................................... 85 85
--------- -------------
Total short-term obligations......................................................... 1,135 760(1)
--------- -------------
Subordinated debt...................................................................... 1,857 1,857
Revolving line of credit............................................................... 4,022 4,022
Capitalized leases..................................................................... 129 129
--------- -------------
Total long-term obligations.......................................................... 6,008 6,008
--------- -------------
Shareholders' equity:
Common stock......................................................................... 1,263 1,328(2)
Additional paid-in capital........................................................... 112 8,765(3)
Accumulated deficit.................................................................. (3,228) (4,783)(4)
--------- -------------
Total shareholders' (deficiency) equity............................................ (1,853) 5,310
--------- -------------
Total capitalization............................................................... $ 5,290 $ 12,078
--------- -------------
--------- -------------
</TABLE>
- ------------------------
(1) Represents repayment of $375,000 of subordinated debt from the proceeds of
the Private Placement.
(2) Reflects the following:
<TABLE>
<CAPTION>
PRO FORMA
AS ADJUSTED
-----------
<S> <C>
OSP Common Stock -- par value.................................................... $ 1,263
Common Stock issued to effect the KRSI Merger.................................... 20
Common Stock issued to effect the Private Placement.............................. 45
-----------
$ 1,328
-----------
-----------
</TABLE>
53
<PAGE>
(3) Reflects the following:
<TABLE>
<S> <C>
OSP additional paid-in capital................................... $ 112
Common Stock issued to effect the KRSI Merger.................... 3,042
Common Stock issued to effect the Private Placement.............. 6,711
Less transaction costs associated with the Private Placement..... (1,100)
-----------
$ 8,765
-----------
-----------
</TABLE>
(4) Reflects the following:
<TABLE>
<S> <C>
The Company accumulated deficit.................................. $ (3,228)
Declaration of a dividend payable to the OSP Shareholders........ (1,750)
Estimated dividend to the OSP shareholders for their actual tax
liabilities..................................................... (600)
Recognition of Company deferred income tax assets from change to
C corporation................................................... 795
-----------
$ (4,783)
-----------
-----------
</TABLE>
54
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
OSP PUBLISHING, INC. AND SUBSIDIARIES
The following selected consolidated financial data should be read in
conjunction with the Company's consolidated financial statements and the related
notes and with "Management's Discussion and Analysis of Financial Condition and
Results of Operations of the Company" included elsewhere herein. The selected
consolidated balance sheet data presented below for the years ended December 31,
1994 and 1995 and of the consolidated statement of operations data presented
below for the years ended December 31, 1993, 1994 and 1995 are derived from the
consolidated financial statements of the Company included elsewhere herein,
which financial statements have been audited by Deloitte & Touche LLP,
independent certified public accountants. The selected consolidated balance
sheet data presented below as of December 31, 1993, are derived from financial
statements of the Company not included herein which have been audited by
Deloitte & Touche LLP, independent certified public accountants. The selected
consolidated balance sheet data presented below as of December 31, 1991 and 1992
and consolidated statement of operation data presented below for the years ended
December 31, 1991 and 1992 are derived from financial statements of the Company
audited by the other auditors not included herein. The selected consolidated
balance sheet data as of March 31, 1996 and the consolidated statement of
operations data for the three months ended March 31, 1995 and 1996 have been
derived from the Company's unaudited consolidated financial statements.
Operating results for the three months ended March 31, 1996 may not be
indicative of the results that may be expected for the year ending December 31,
1996 or any future period.
<TABLE>
<CAPTION>
THREE MONTHS
ENDED MARCH
YEARS ENDED DECEMBER 31, 31,
------------------------------------------- --------------
1991 1992 1993 1994 1995 1995 1996
------- ------- ------- ------- ------- ------ ------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
Net Sales.................................. $16,173 $17,126 $38,108 $42,168 $38,228 $7,421 $8,941
Cost of sales.............................. 9,304 9,297 22,335 25,140 21,647 4,092 5,270
------- ------- ------- ------- ------- ------ ------
Gross profit............................... 6,869 7,829 15,773 17,028 16,581 3,329 3,671
Operating expenses......................... 5,770 7,143 13,797 16,636 15,172 3,503 3,805
------- ------- ------- ------- ------- ------ ------
Income (loss) from operations.............. 1,099 686 1,976 392 1,409 (174) (134)
Interest expense........................... 562 429 605 685 841 173 267
------- ------- ------- ------- ------- ------ ------
Income (loss) from continuing operations... $ 537 $ 257 $ 1,371 $ (293) $ 568 $ (347) $ (401)
------- ------- ------- ------- ------- ------ ------
------- ------- ------- ------- ------- ------ ------
PRO FORMA INCOME FROM CONTINUING OPERATIONS
DATA (1, 2):
Income (loss) before income taxes, minority
interest and discontinued operations, as
reported.................................. $ 537 $ 257 $ 1,371 $ (293) $ 568 $ (347) $ (401)
Pro forma provision (benefit) for income
taxes (2)................................. 255 266 344 (43) 114 (70) (85)
------- ------- ------- ------- ------- ------ ------
Pro forma net income (2)................... $ 282 $ (9) $ 1,027 $ (250) $ 454 $ (277) $ (316)
------- ------- ------- ------- ------- ------ ------
------- ------- ------- ------- ------- ------ ------
PER SHARE DATA:
Pro forma (loss) income from continuing
operations per share...................... $ 0.06 $(0.03) $(0.04)
------- ------ ------
------- ------ ------
Weighted average shares outstanding (3).... 8,037 8,036 8,037
------- ------ ------
------- ------ ------
</TABLE>
<TABLE>
<CAPTION>
AS OF DECEMBER 31, AS OF
------------------------------------------ MARCH 31,
1991 1992 1993 1994 1995 1996
------- ------ ------- ------- ------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
CONSOLIDATED BALANCE SHEET
DATA (1):
Working capital
(deficiency)............... $ 2,141 $1,587 $ 2,337 $ (197) $ 3,312 $ 3,285
Total assets................ 6,439 6,427 13,464 13,841 11,698 13,933
Total debt, including
current portion............ 5,219 2,896 5,129 6,724 5,989 7,143
Shareholders' equity
(deficiency)............... $(1,075) $ 266 $ 637 $(1,408) $(1,299) $(1,853)
</TABLE>
- ------------------------------
(1) In December 1994, the Company determined to discontinue its Top Banana
division. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations of The Company -- Discontinued Operations" and
Note 12 of Notes to Consolidated Financial Statements.
(2) The Company has been taxed as an S Corporation for federal and state income
tax purposes since 1989. Pro forma income taxes, pro forma loss from
continuing operations, and pro forma loss from continuing operations per
share reflect the pro forma effect of income taxes as if the Company had
been taxed as a C Corporation for all periods presented. Upon consummation
of the Transactions, Global One will be subject to federal and state income
taxes. See "S Corporation Distributions."
(3) Assumes as outstanding, during each of the periods indicated, 1,393,550
shares of the shares being offered by Global One in the Private Placement,
which represent the approximate number of shares deemed to be sold by Global
One to fund the $1,750,000 S Corporation distribution described in "S
Corporation Distributions." See "S Corporation Distributions" and Note 13 of
Notes to Consolidated Financial Statements.
55
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS OF THE COMPANY
GENERAL
The following discussion is intended to provide information to facilitate
the understanding and assessment of significant changes and trends related to
the financial condition of the Company and the results of its operations. This
discussion and analysis should be read in conjunction with the Company's audited
consolidated financial statements and the notes thereto included elsewhere
herein.
The business of the Company is conducted through OSP, SDI and BEx, each of
which conducts a distinct business. OSP develops and markets posters
incorporating primarily licensed images and characters from motion pictures,
television, animation, music, sports and popular culture. Non-licensed posters
published by OSP included generic posters, WalletCards, BookBites-TM-, movie
scripts and framed and unframed wall decor of models, cars, airplanes and
popular phrases. SDI develops and markets licensed and non-licensed T-shirts,
sweatshirts, hats, boxer shorts and mugs. BEx develops and markets licensed and
non-licensed buttons, key rings and stickers. See "Business of The Company."
The Company derives a significant portion of its revenues from properties
which have demonstrated continuing market appeal year after year, such as
Disney's and Warner Bros.' standard characters, including MICKEY MOUSE and BUGS
BUNNY, television programs, Playboy's PLAYMATE OF THE YEAR and classic icons,
such as Marilyn Monroe and the Doors ("Standard Properties"). During the last
three years, OSP has experienced increased sales of products attributable to its
Standard Properties due to the wider distribution of display racks to retailers.
Approximately 3,500 new display racks were put in service in 1994 and 3,000 new
display racks were put in service in 1995. Additional revenues are derived each
year from other promotional products associated with hit films and television
shows which generally have a much shorter product life ("Promotional
Properties"). The Company attempts to identify and acquire licenses for
Promotional Properties to capitalize on popular culture trends. However, whether
or not a Promotional Property achieves significant sales depends on a number of
factors that are out of the control of the Company, including marketing efforts
by licensors and the appeal of such Promotional Properties to the target market.
Management believes that to date, Promotional Properties have accounted for a
larger percentage of SDI's and BEx's revenues than Standard Properties.
Accordingly, variations in the Company's revenues from year to year are largely
attributable to the success achieved by Promotional Properties in any given
year. The Company's business strategy includes increasing its core business on
Standard Properties as a percentage of net sales by increasing the number of
display racks supplied to mass retailers, increasing the number of Standard
Properties and expanding its international business. Management anticipates
continuing fluctuations from year to year to the extent the Company's
Promotional Products achieve success in any given year. See "Business of The
Company -- Business Strategy." No assurances can be given that the Company will
be successful in these efforts.
56
<PAGE>
RESULTS OF OPERATIONS
The following tables set forth the net sales, total cost of sales and gross
profit of OSP, SDI, BEx and the Company, for the three months ended March 31,
1995 and 1996 and for the years ended December 31, 1993, 1994 and 1995.
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED MARCH 31,
----------------------------------------------------
1995 1996
------------------------- -------------------------
AMOUNT % OF SALES AMOUNT % OF SALES
----------- ------------ ----------- ------------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C>
Net Sales
OSP....................................................... $ 5.2 100.0% $ 4.6 100.0%
SDI....................................................... 1.5 100.0 4.1 100.0
BEx....................................................... 0.7 100.0 0.2 100.0
--- ---
Company................................................... $ 7.4 100.0 $ 8.9 100.0
--- ---
--- ---
Cost of Goods Sold
OSP....................................................... $ 2.1 40.4 $ 1.8 39.1
SDI....................................................... 0.8 53.3 2.4 58.5
BEx....................................................... 0.3 42.9 0.1 50.0
--- ---
Company................................................... $ 3.2 43.2 $ 4.3 48.3
--- ---
--- ---
License and royalty expense
OSP....................................................... 0.7 13.5 0.6 13.0
SDI....................................................... 0.2 13.3 0.3 7.3
BEx....................................................... 0.0 0.0 0.0 0.0
--- ---
Company................................................... $ 0.9 12.2 $ 0.9 10.1
--- ---
--- ---
Total Cost Of Sales
OSP....................................................... $ 2.8 53.8 $ 2.4 52.2
SDI....................................................... 1.0 66.7 2.7 65.9
BEx....................................................... 0.3 42.9 0.1 50.0
--- ---
Company................................................... $ 4.1 55.4 $ 5.2 58.4
--- ---
--- ---
Gross Profit
OSP....................................................... $ 2.4 46.2 $ 2.2 47.8
SDI....................................................... 0.5 33.3 1.4 34.1
BEx....................................................... 0.4 57.1 0.1 50.0
--- ---
Company................................................... $ 3.3 44.6 $ 3.7 41.6
--- ---
--- ---
</TABLE>
57
<PAGE>
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
-------------------------------------------------------------------------------
1993 1994 1995
------------------------- ------------------------- -------------------------
AMOUNT % OF SALES AMOUNT % OF SALES AMOUNT % OF SALES
----------- ------------ ----------- ------------ ----------- ------------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C>
Net Sales
OSP........................................... $ 19.5 100.0% $ 23.6 100.0% $ 25.2 100.0%
SDI........................................... 15.5 100.0 11.1 100.0 10.1 100.0
BEx........................................... 3.1 100.0 7.5 100.0 2.9 100.0
----- ----- -----
Company....................................... $ 38.1 100.0 $ 42.2 100.0 $ 38.2 100.0
----- ----- -----
----- ----- -----
Cost of Goods Sold
OSP........................................... $ 7.7 39.5 $ 9.7 41.1 $ 9.8 38.9
SDI........................................... 8.6 55.5 6.8 61.3 5.9 58.4
BEx........................................... 1.1 35.5 2.9 38.7 1.3 44.8
----- ----- -----
Company....................................... $ 17.4 45.7 $ 19.4 46.0 $ 17.0 44.5
----- ----- -----
----- ----- -----
License and Royalty Expense
OSP........................................... $ 3.0 15.4 $ 3.7 15.7 $ 3.5 13.9
SDI........................................... 1.5 9.7 1.2 10.8 0.9 8.9
BEx........................................... 0.4 12.9 0.9 12.0 0.3 10.3
----- ----- -----
Company....................................... $ 4.9 12.9 $ 5.8 13.7 $ 4.7 12.3
----- ----- -----
----- ----- -----
Total Cost of Sales
OSP........................................... $ 10.7 54.9 $ 13.4 56.8 $ 13.3 52.8
SDI........................................... 10.1 65.2 8.0 72.1 6.8 67.3
BEx........................................... 1.5 48.4 3.8 50.7 1.6 55.2
----- ----- -----
Company....................................... $ 22.3 58.5 $ 25.2 59.7 $ 21.7 56.8
----- ----- -----
----- ----- -----
Gross Profit
OSP........................................... $ 8.8 45.1 $ 10.2 43.2 $ 11.9 47.2
SDI........................................... 5.4 34.8 3.1 27.9 3.3 32.7
BEx........................................... 1.6 51.6 3.7 49.3 1.3 44.8
----- ----- -----
Company....................................... $ 15.8 41.4 $ 17.0 40.3 $ 16.5 43.2
----- ----- -----
----- ----- -----
</TABLE>
58
<PAGE>
The following tables sets forth the percentage of net sales of certain
income and expense items for the three months ended March 31, 1995 and 1996 and
for the years ended December 31, 1993, 1994 and 1995.
<TABLE>
<CAPTION>
PERCENTAGE OF
NET SALES
THREE MONTHS ENDED PERIOD TO PERIOD
MARCH 31, PERCENTAGE CHANGE
------------------------ -----------------
1995 1996 1995 VS. 1996
----------- ----------- -----------------
<S> <C> <C> <C>
Net sales............................................................... 100.0% 100.0% 20.3%
Cost of goods sold...................................................... 43.2 48.3 34.4
License and royalty expense............................................. 12.2 10.1 --
Gross profit............................................................ 44.6 41.6 12.1
Warehouse and selling expenses.......................................... 30.2 26.3 4.9
General and administrative.............................................. 17.0 16.3 15.2
Operating income........................................................ (2.3) (1.5) 23.3
Interest expense........................................................ 2.3 3.0 54.9
Minority interest in (income) loss of subsidiaries...................... 0.5 (0.5) (221.7)
Net income.............................................................. (2.4) (5.8) (190.4)
</TABLE>
<TABLE>
<CAPTION>
PERCENTAGE OF
NET SALES PERIOD TO PERIOD
YEAR ENDED PERCENTAGE CHANGE
DECEMBER 31, ------------------------
------------------------------------- 1993 VS. 1994 VS.
1993 1994 1995 1994 1995
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Net sales............................................... 100.0% 100.0% 100.0% 10.8% (9.5)%
Cost of goods sold...................................... 45.7 46.0 44.5 11.5 (12.4)
License and royalty expense............................. 12.9 13.7 12.3 18.4 (19.0)
Gross profit............................................ 41.4 40.3 43.2 7.6 (2.9)
Warehouse and selling expenses.......................... 23.2 25.7 26.7 22.4 (5.8)
General and administrative expenses..................... 13.0 13.8 13.0 17.4 (14.5)
Operating income........................................ 5.2 0.8 3.5 (80.2) 259.5
Interest expense........................................ 1.6 1.6 2.2 13.3 22.7
Minority interest in (income) loss of subsidiaries...... (1.0) 0.4 (0.6) 139.2 (264.2)
Income before discontinued operations................... 1.5 (0.6) 1.1 (146.2) 255.5
Discontinued operations................................. 0.3 (1.8) -- (689.2) --
Net income.............................................. 2.1 (2.4) 1.1 (226.8) 139.1
</TABLE>
DISCONTINUED OPERATIONS
In 1991, the Company started the Top Banana division which primarily
developed and marketed licensed children's electronic banks and clocks, which
were manufactured exclusively in the Far East. In December 1994, the Company
decided to wind down the division due to large losses attributable primarily to
the financing of Top Banana's working capital needs through letters of credit,
excessive time to source products from the Far East and a distribution system
that was distinct from its distribution system for posters, T-shirts and
buttons. This process was substantially completed in 1995.
The loss from discontinued operations was $770,000 on sales of $3.5 million
in 1994 compared to income of $131,000 on sales of $2.6 million in 1993. Of the
loss from discontinued operations recognized during 1994, $424,000 was due to an
operating loss and $346,000 was due to the estimated loss on disposal of the
operation. No additional loss from discontinued operations was recognized in
1995 as the reserve for loss on disposal established in 1994 was sufficient.
These operations have been accounted for as a discontinued operation for all
periods presented.
59
<PAGE>
THREE MONTHS ENDED MARCH 31, 1996 COMPARED WITH THREE MONTHS ENDED MARCH 31,
1995
The Company's net sales increased $1.5 million, or 20.5%, during the first
quarter of 1996 compared to the first quarter of 1995. This increase resulted
primarily from a $2.6 million increase in sales by SDI that more than offset a
$600,000 decrease in sales by OSP and a $500,000 decrease in sales by BEx. The
173.3% increase in SDI's sales is principally due to the popularity of the
Anheuser-Busch licenses ("I LOVE YOU, MAN" and FROGS). The 11.5% decrease in OSP
sales is related to the significant sales generated in the first quarter of 1995
by LEGENDS OF THE FALL-Brad Pitt and LION KING. BEx's sales decreased 71.4%
compared to the first quarter of 1995 primarily to due to the reorganization of
the Company's management, redirection of the marketing and sales effort, and
relocation of the Company's operations.
Cost of goods sold increased $1.1 million, or 34.4%, in the first quarter of
1996 to $4.3 million compared with $3.2 million in the first quarter of 1995. As
a percentage of net sales, cost of goods increased to 48.3% in the first quarter
of 1996 from 43.2% in the first quarter of 1995. The Company's cost of goods
increased primarily because SDI, which typically has the highest cost of goods
sold, comprised 46.1% of the Company's total sales in the first quarter of 1996
compared to 20.3% in the first quarter of 1995.
OSP's cost of goods sold decreased $300,000, or 14.3%, to $1.8 million in
the first quarter of 1996 from $2.1 million in the first quarter of 1995
primarily due to slightly lower printing and paper costs.
SDI's cost of goods sold increased by $1.6 million, or 200.0%, to $2.4
million in the first quarter of 1996 from $800,000 in the first quarter of 1995.
SDI's cost of goods sold as a percentage of sales in the first quarter of 1996
was 58.5% compared to 53.3% in the first quarter of 1995. SDI's net sales
increased significantly, thereby contributing to the large increase in the
overall cost of goods sold. The increase in the cost of goods sold as a
percentage is primarily due to the increase in sales of products to mass
retailers, which are typically sold at a lower price compared to specialty and
gift retailers.
BEx's cost of goods sold decreased by $200,000, or 66.7%, to $100,000 in the
first quarter of 1996 compared to $300,000 in the first quarter of 1995. BEx's
cost of goods sold as a percentage of sales increased to 50.0% in the first
quarter of 1996 from 42.9% in the first quarter of 1995 due primarily to
decreased efficiency as a result of the relocation of the Company's operations
and reorganization of management.
License and royalty expense, as a percentage of sales decreased to 10.1% in
the first quarter of 1996 from 12.2% in the first quarter of 1995 due to the
increase in sales of products under lower royalty rate licenses as a percentage
of total sales of licensed products. OSP's royalty rate decreased to 13.0% in
the first quarter of 1996 from 13.5% in the first quarter of 1995 due primarily
from an $850,000 decrease in sales for Disney licenses which have higher royalty
rates. SDI's royalty rate decreased to 7.3% in the first quarter of 1996 from
13.3% in the first quarter 1995 primarily due to the addition of a license which
has a lower royalty rate than most of SDI's film and television licenses. This
license generated $2.1 million in sales, or 51.2%, of SDI's total sales in the
first quarter of 1996.
Warehouse and selling expenses increased $110,000, or 4.9%, to $2.4 million
in the first quarter of 1996 from $2.3 million in the first quarter of 1995.
Factors contributing to this increase included an increase of $234,000 in
commissions and an increase of $59,000 in freight by SDI due to the 173.3%
increase in sales. These increases were offset by BEx's overall decrease of
$173,000 in warehouse and selling expenses. This decrease is related to BEx
moving its warehouse operation into OSP's facility. Warehouse and selling
expenses as a percentage of sales decreased to 26.3% in the first quarter of
1996 from 30.2% in the first quarter of 1995.
General and administrative expenses increased by $191,000, or 15.2%, to $1.5
million in the first quarter of 1996 from $1.3 million in the first quarter of
1995, due primarily to an increase of $68,000 in legal, accounting and other
professional fees and a bonus to the President of SDI of $149,000. Additionally,
reductions in general and administrative expense were due to the BEx relocation
which accounted for a $31,000 decrease in costs.
60
<PAGE>
Operating loss decreased $40,000, or 23.3%, in the first of quarter 1996 to
$134,000 compared to $174,000 in the first of quarter 1995. As a percentage of
sales, operating loss decreased to 1.5% in the first quarter of 1996 compared
with 2.3% of sales in the first quarter of 1995. The decrease in operating loss
was attributable to the lower operating expenses as a percentage of sales
discussed above.
Interest expense increased $95,000, or 54.9%, to $268,000 in the first of
quarter 1996 from $173,000 in the first quarter of 1995. The increase in
interest expense was due primarily to an increase in the contractual interest
rate charged on the outstanding borrowings by OSP and BEx prior to the
refinancing of the credit line in February 1996. Additionally, SDI's interest
expense increased due to additional factoring of accounts receivable resulting
from the increase in first quarter sales.
The Company's income tax provision in the first quarter of 1996 was $67,000,
compared with an income tax benefit of $133,000 recorded in the first quarter of
1995, an increase of $200,000. The tax provision in 1996 was attributable to
increased net income at SDI and no recognition of a tax benefit for BEx's
operating losses which had been recorded in 1995 due to available tax
carrybacks.
The Company's net loss increased $337,000, or 190.4%, to $514,000 in the
first quarter of 1996 compared with a loss of $177,000 in the first quarter of
1995. As a percentage of sales, the net loss was 5.8% in the first quarter of
1996 compared to 2.4% in the first quarter 1995.
YEAR ENDED DECEMBER 31, 1995 COMPARED WITH YEAR ENDED DECEMBER 31, 1994
The Company's net sales decreased $3.9 million, or 9.3%, during 1995
compared with 1994. This decrease resulted primarily from a $4.6 million
decrease in sales by BEx and a $956,000 decrease in sales by SDI which more than
offset a $1.6 million increase in sales by OSP. The 61.1% decrease in the BEx
sales was principally due to BEx not having a uniquely popular licensed property
to generate sales during 1995, as contrasted to sales of products based on THE
LION KING and MIGHTY MORPHIN POWER RANGERS licenses in 1994. OSP's sales
increased 6.8% in 1995 from 1994 primarily due to new products and more
retailers selling its products. In 1995, SDI's sales decreased 9.0% because SDI
did not have a licensed property that generated broad appeal to customers who
purchase from mass retailers.
Cost of goods sold decreased $2.4 million, or 12.4%, to $17.0 million in
1995 compared to $19.4 million in 1994, due primarily to the decrease in cost of
goods as a percentage of sales of OSP and SDI, which more than offset the
increase in the cost of goods as a percentage of sales of BEx. As a percentage
of net sales, cost of goods sold dropped from 46.0% in 1994 to 44.5% in 1995.
The Company's cost of goods as a percentage of sales improved since OSP, which
has the lowest cost of goods as a percentage of sales, comprised 66.0% of the
Company's total net sales in 1995, compared with 55.9% in 1994.
Although OSP's cost of goods sold increased by $160,000, or 1.7%, to $9.8
million in 1995 from $9.7 million in 1994, OSP's cost of goods as a percentage
of sales decreased from 41.1% in 1994 to 38.9% in 1995, primarily because OSP
sold more products and was able to charge more for its products by selling them
directly to retailers rather than through distributors. In 1995, the amount of
sales to retailers was 70.9% of total OSP sales, compared to 68.0% of total OSP
sales in 1994.
SDI's cost of goods decreased by $944,000, or 13.8%, to $5.9 million in 1995
from $6.8 million in 1994. SDI's cost of goods as a percentage of sales in 1995
was 58.4% compared to 61.3% in 1994. Although SDI's net sales decreased, thereby
contributing to a decrease in the overall cost of goods sold, the decrease in
the cost of goods as a percentage of sales was largely attributable to SDI's
ability to sell more of its products to specialty and gift retailers at a higher
price than it would typically obtain from sales to mass retailers. During 1995,
SDI sold approximately 70% of its products to specialty and gift retailers in
1995, compared to approximately 60% in 1994.
BEx's cost of goods decreased by $1.6 million, or 55.2%, to $1.3 million in
1995 from $2.9 million in 1994. However, BEx's cost of goods as a percentage of
sales in 1995 was 44.8% compared to 38.7% in
61
<PAGE>
1994. The increase in the cost of goods as a percentage of sales was due to
continued selling of BEx's products at low prices as part of a concerted effort
to reduce excess inventory levels, and since a significant amount of BEx's sales
were at a lower price to OSP, for inclusion of BEx's products in OSP's
integrated product displays, rather than directly to retailers.
License and royalty expense decreased $1.1 million or 19.8% to $4.7 million
in 1995 from $5.8 million in 1994. As a percentage of sales, royalties were
12.3% in 1995, compared with 13.7% in 1994. This was due to the increase in
sales of products under lower royalty rate licenses as a percentage of total
sales of licensed products. The most significant royalty reduction occurred in
OSP, despite an increase in sales of $1.6 million. OSP's royalties decreased by
approximately $200,000 in 1995 compared with 1994. As a percentage of sales,
OSP's royalty rate decreased to 13.9% in 1995 from 15.7% in 1994, primarily due
to a reduction in sales of products created under higher royalty rate licenses
such as Disney and Nike. As a percentage of sales, these two licensors
represented 26.6% of OSP sales in 1995, compared with 44.3% of OSP sales in
1994. Sales under Disney licenses decreased in 1995 because the popularity of
the POCAHONTAS licensed merchandise in 1995 was not as great as the popularity
of THE LION KING licensed merchandise in 1994. The Company did not renew the
license to sell Nike products. In addition, OSP increased distribution of
competitors's products, for which it does not pay royalties.
Warehouse and selling expenses decreased $623,000, or 5.8%, to $10.2 million
in 1995 from $10.8 million in 1994. Factors contributing to this reduction
included a decrease of $458,000 in commissions and a decrease of $160,000 in
freight expenses. Because these expenses are generally directly related to sales
volume, warehouse and selling expenses remained relatively constant as a
percentage of sales, at 26.7% in 1995, compared with 25.7% in 1994. During 1995,
the Company consolidated its warehouse operations in its Bell, California
facilities, and it is anticipated that this consolidation will have the effect
of decreasing warehouse and selling expenses as a percentage of sales in the
future.
General and administrative expenses decreased by $842,000, or 14.5%, to $5.0
million in 1995 compared with $5.8 million in 1994, due primarily to a decrease
of $494,000 in salaries and related employee expenses, a decrease of $203,000 in
legal, accounting and other professional fees and a decrease of $263,000 in the
bad debt provision, which decreases were offset by a $134,000 increase in other
outside services. The decrease reflects certain one time expenses incurred
during 1994, including bonuses paid to the Presidents of SDI and BEx, and
additional legal expenses relating to an abandoned attempt to acquire a poster
distributor. As a percentage of sales, general and administrative expenses
decreased slightly, from 13.8% of sales in 1994 to 13.0% of sales in 1995.
Operating income increased by $1.0 million, or 259.5%, in 1995 to $1.4
million in 1995 compared with $392,000 in 1994, despite the 9.3% decrease in
sales. The increase in operating income was attributable to the lower operating
expenses discussed above. As a percentage of sales, operating income increased
to 3.7%, compared with 0.9% of sales in 1994.
Interest expense increased $156,000, or 22.8%, to $841,000 in 1995 from
$685,000 in 1994. The increase in interest expense was due primarily to an
increase in the contractual interest rate charged on the borrowings by OSP and
BEx due to their violation of certain covenants under their loan agreement.
Additionally, total outstanding borrowings were higher in 1995, including
subordinated debt issued in the fourth quarter. As a percentage of sales,
interest expense was 2.2% of sales in 1995, compared with 1.6% of sales in 1994.
The credit line was refinanced in February 1996. See "-- Liquidity and Capital
Resources."
OSP has a 79% interest in BEx and a 51% interest in SDI. Accordingly, the
minority shareholders' interest in income of the subsidiaries has the effect of
reducing the Company's net income when a subsidiary is profitable. When a
subsidiary is unprofitable, a portion of the loss may be allocated to the
minority interest, if the minority shareholder's basis in his stock has not
already been reduced to zero. In 1995, BEx had a loss of $329,000 and SDI had
net income of $556,000. After allocating a portion of
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these amounts to the minority interest, the minority interest in income of
subsidiaries on a consolidated basis was $243,000 in 1995, which had the effect
of reducing the Company's consolidated net income by the same amount. Global One
will acquire 100% of the shares of BEx in connection with the Reorganization.
OSP has been taxed as an S Corporation for federal and state income tax
purposes since 1989. Pro forma income taxes, pro forma loss from continuing
operations, and pro forma loss from continuing operations per share reflect the
pro forma effect of income taxes as if OSP had been taxed as a C Corporation for
all periods presented. Upon consummation of the Transactions, Global One will be
subject to federal and state income taxes. See "S Corporation Distributions."
Net income increased to $403,000 in 1995 compared with a net loss of $1.0
million in 1994. This increase was the result of decreased cost of goods,
royalties and operating expenses discussed above and the absorption in 1994 of
the discontinued operations. As a percentage of sales, net income was 1.1% of
sales in 1995, compared with a loss of 2.4% of sales in 1994.
YEAR ENDED DECEMBER 31, 1994 COMPARED WITH YEAR ENDED DECEMBER 31, 1993
The Company's net sales increased $4.1 million, or 10.7%, during 1994
compared with 1993. This increase resulted primarily from a $4.4 million
increase in sales by BEx and a $4.1 million increase in sales by OSP which more
than offset a $4.4 million decrease in sales by SDI. The increase in OSP's and
BEx's sales was principally due to the sale of merchandise based on THE LION
KING and MIGHTY MORPHIN POWER RANGERS licenses and the continued expansion into
the mass retailers and other retail chains in 1994. The decrease in sales at SDI
in 1994 was due to the reduction in the popularity of the BEAVIS & BUTT-HEAD
license.
Cost of goods sold increased $2.0 million or 11.0% to $19.4 million in 1994
from $17.4 million in 1993, due primarily to the increase in net sales. As a
percentage of sales, the Company's cost of goods however, remained relatively
constant at 46.0% in 1994, compared with 45.7% in 1993.
OSP's cost of goods sold increased by $2.0 million, or 25.5%, to $9.7
million in 1994 from $7.7 million in 1993. As a percentage of sales, OSP's cost
of goods increased from 39.5% in 1993 to 41.1% in 1994, primarily because of
increased material costs, product mix and the distribution of other publisher's
products. To a lesser extent, OSP sold a slightly larger percentage of OSP's
products to mass retailers at a lower price.
SDI's cost of goods decreased by $1.8 million, or 20.9%, to $6.8 million in
1994 from $8.6 million in 1993. However, as a percentage of sales, SDI's cost of
goods in 1994 was 61.3% compared to 55.5% in 1993 primarily because of higher
material costs and the sale of a lower percentage of SDI's products to specialty
and gift retailers at a higher price. During 1994, SDI sold approximately 60% of
its products to specialty and gift retailers, compared to approximately 80% in
1993.
BEx's cost of goods increased by $1.8 million, or 156.9%, to $2.9 million in
1994 from $1.1 million in 1993. As a percentage of sales, BEx's cost of goods
increased to 38.7% in 1994 from 35.5% in 1993. The increase in the cost of goods
as a percentage of sales was due to the use of outside manufacturers to produce
BEx's products, compared to 1993 when a larger percentage of BEx's products were
manufactured in-house.
License and royalty expense increased $880,000, or 18.0%, to $5.8 million in
1994 from $4.9 million in 1993. As a percentage of sales, the average royalty
rate increased from 12.9% in 1993 to 13.7% in 1994. In 1994, OSP's and BEx's
royalties increased approximately $670,000 and $480,000, respectively, while
SDI's royalties decreased $270,000. The reason for the increased royalty rates
was the increased sale of higher royalty rate products. Sales under Disney
licenses increased in 1994 because the popularity of THE LION KING licensed
merchandise was greater than the popularity of the ALADDIN licensed merchandise
in 1993.
Warehouse and selling expenses increased by $2.0 million, or 22.4%, to $10.8
million in 1994 from $8.8 million in 1993. This was due primarily to increases
of approximately $500,000 in warehouse
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salaries, $300,000 in repairs and maintenance, $661,000 in sales salaries and
$284,000 in freight-out expense. The predominant reason for the increase as a
percentage of sales was the addition of a Vice President of Sales and other
management and support staff. As a percentage of sales, warehouse and selling
expenses were 25.7% of sales in 1994, compared with 23.2% of sales in 1993.
General and administrative expenses increased $860,000 or 17.4% to $5.8
million in 1994 from $5.0 million in 1993. As a percentage of sales, general and
administrative expenses were 13.8% of sales in 1994 compared with 13.0% of sales
in 1993. The increase in general and administrative expenses reflects certain
expenses incurred during 1994, including bonuses paid to the Presidents of SDI
and BEx of $510,000, an increase of $330,000 in the bad debt provision.
Additionally, a bonus of $833,000 was paid to the President of SDI in 1993. This
amount, however, was largely offset by an overall increase in salaries of
$898,000 in 1994.
Operating income decreased $1.6 million or 80.2% to $392,000 in 1994 from
$2.0 million in 1993. As a percentage of sales, operating income decreased to
0.9% of sales in 1994, compared with 5.2% in 1993. The decrease was attributable
to the higher operating expenses discussed above, despite the 10.7% sales
increase.
Interest expense increased $80,000 or 13.2% to $685,000 in 1994 from
$605,000 in 1993. As a percentage of sales, interest expense remained relatively
constant at 1.6% of sales in both 1994 and 1993. Although interest expense
remained relatively constant overall, OSP's interest expense increased by
$152,000 in 1994 due to continued reliance on its line of credit to finance its
growth, while SDI's and BEx's interest expense decreased by $56,000 and $16,000,
respectively.
In 1994, BEx had a net income of $57,000 and SDI had a loss of $327,000.
After allocating a portion of these amounts to the minority interest, the
minority interest in loss of subsidiaries on a consolidated basis was $148,000,
which had the effect of increasing the Company's consolidated net income by the
same amount.
The Company incurred a loss of $1.0 million or 2.4% of sales in 1994 from
income of $813,000 or 2.1% of sales in 1993. This decrease was the result of the
higher royalty rates and increased operating expenses discussed above and the
loss due to discontinued operations. See "-- Discontinued Operations."
LIQUIDITY AND CAPITAL RESOURCES
At March 31, 1996, working capital was approximately $3.3 million. Net cash
used in operating activities during the three months ended March 31, 1996 was
approximately $800,000 due primarily to a loss of $514,000 in the first quarter
of 1996, an increase of $665,000 in accounts receivable, an increase of $921,000
in inventory and offset by an increase in accounts payable of $1.2 million. Net
cash provided by financing activities during the three months ended was
approximately $1.1 million due primarily to increased borrowings of $1.2 million
under its credit facilities.
In February 1996, OSP and BEx arranged a line of credit, with a three-year
term, in the amount of $7.5 million at an interest rate of 1.75% above the
reference rate which was collateralized by substantially all of OSP's and BEx's
assets. See Note 6 of Notes to Consolidated Financial Statements. At April 30,
1996, OSP and BEx had $3.0 million outstanding and $60,000 available under the
credit line. OSP and BEx are currently in compliance with the terms of the
credit agreement. At April 30, 1996, SDI's borrowing availability under its
factoring agreement was $1.1 million.
At December 31, 1995, working capital was approximately $3.3 million
compared to a deficit of $197,000 at December 31, 1994. This increase was
primarily the result of improved operations and the refinancing of $2.8 million
of short-term borrowings into long-term financing and the private placement of
$750,000 in subordinated debt. See Note 6 of Notes to Consolidated Financial
Statements of OSP.
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<PAGE>
During 1995, net cash provided by operating activities was approximately
$1.5 million primarily due to net income and minority interest in income of
subsidiaries of $403,000 and $243,000, respectively, $430,000 in depreciation
and amortization, $1.1 million decrease in accounts receivable and $885,000
decrease in inventory. These items more than offset the decrease in accounts
payable, accrued expenses and royalties payable of $799,000, $384,000 and
$837,000, respectively.
Net cash used in investing activities was approximately $609,000 during 1995
as a result of capital expenditures for tenant improvements, furniture and
display racks, and equipment at the Company's headquarters. See "Business of the
Company -- Properties." During 1995, net cash used in financing activities was
approximately $1.1 million primarily as a result of payments on revolving line
of credit and dividends paid of $1.4 million and $793,000, respectively, which
more than offset the borrowing on long-term subordinated debt of $750,000 and
issuance of $500,000 of common stock resulting from the reinvestment of a
portion of dividends paid to shareholders.
The Company's working capital requirements generally peak in the second
quarter of each year as its production increases in order to coincide with the
release of summer movies. Typically, the Company's sales during the first
quarter are generally lower than at other times during the year, and the Company
experiences a loss during the first quarter. See " -- Seasonality." During this
period, the Company's primary sources of liquidity have been its line of credit
and extended credit terms allowed by its vendors. See Note 6 of Notes to
Consolidated Financial Statements of OSP.
Due to the failure of the Company's Top Banana division to achieve projected
sales in the fourth quarter of 1994, the Company did not experience an
anticipated increase in accounts receivable to support advances under its credit
agreement in order to finance its 1995 first quarter operations. See " --
Discontinued Operations." In addition, at December 31, 1994, the Company was in
violation of all of its bank covenants under its loan agreement. The lender
declared the Company in technical default in June 1995, although the Company did
not have a payment default under the loan agreement.
As a result of the violations, the lender reduced the advance rate and
increased the interest rate charged on borrowings. The lender agreed to forbear
from proceeding against the collateral and approved monthly amendments to the
original credit agreement. Since the Company did not have adequate cash
reserves, it was delinquent on royalty payments and was unable to pay its
obligations on a current basis. The Company was able to continue its operations
at that time due largely to the willingness of its vendors to extend trade
credit and its licensors not to terminate licenses for the Company's failure to
make royalty payments. The loan matured as of August 1995, and was renewed on a
monthly basis which resulted in increases in the interest rate charged and
reductions in the advance rate permitted. During 1995, the largest amount
outstanding under the loan agreement was $5.9 million. The interest rate
increased from 1.75% over prime to 8.25% over prime during 1995.
Due to the strength of the summer film releases in 1995, in particular the
POCAHONTAS and BATMAN licenses, the Company returned to profitability within
several months. Due to improved cash flow, the Company began to repay its
obligations on a current basis.
However, due to the leveraged nature of the Company's capital structure and
the reduction in advance rates by the Company's lender, the Company continued to
operate under a restricted cash flow. Therefore, in November 1995, the Company
negotiated an infusion of $750,000 of subordinated debt from one of its vendors
for its working capital needs. See Note 7 of Notes to Consolidated Financial
Statements of OSP. During the fourth quarter, the Company began negotiations
with several lenders to obtain a new credit facility in order to replace the
month to month extensions provided by the Company's then current loan agreement.
In addition, the Company retained a financial advisor to seek additional sources
of equity capital.
SDI sells substantially all of its accounts receivable to a factor under a
continuing contract, cancelable upon written notice given 60 days prior to
expiration. In most cases, the factor approves the credit, and the account is
sold without recourse. In cases in which the factor does not approve the credit,
SDI bears the risk. At December 31, 1995, the receivables that were at the risk
of SDI were
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<PAGE>
approximately $251,000. At December 31, 1995, amounts due from the factor
included in accounts receivable-trade were $822,000. The factor, to the extent
of any financing provided, holds a security interest in all accounts receivable
and property of SDI.
As a result of the Private Placement, Global One will net approximately $2.0
million after paying the accrued $1.75 million dividend to the OSP Shareholders,
$375,000 of subordinated debt, $2.2 million for costs related to the
Transactions and an additional dividend of approximately $400,000 to permit the
OSP Shareholders to pay their respective tax liabilities incurred as a result of
OSP's operating results during 1995 and that portion of 1996 prior to Closing.
The Company believes that the new credit facility, together with the anticipated
net proceeds of the Private Placement, will be sufficient to fund its working
capital requirements for the remainder of 1996. Additional financing will be
required to provide for any business or product line acquisitions and
significant expansion of Global One's international business. In addition,
Global One's business plan anticipates that Global One will seek to increase its
distribution of products directly to mass retailers. See "Business of the
Company -- Business Strategy." The extent to which Global One is successful in
achieving its business plan will depend on the availability of capital for the
purchase of additional display racks to place in retail establishments. There
can be no assurance that such additional financing will be available.
EFFECTS OF INFLATION
Global One's management believes that inflation will not have a significant
effect on the Global One's operations.
SEASONALITY
The Company has historically had higher net sales as a percentage of annual
sales in the second quarter. In 1995, the Company recorded 32.9% of its sales in
the second quarter. Management believes that the Company's seasonal sales are
primarily due to the seasonal release of major films which correspond to sales
of promotional products related to such films. Although films that are
anticipated to be major hits are often released in the summer, film distribution
companies frequently release major films in the autumn or during the holidays.
Such fluctuations in sales typically result in corresponding fluctuations in the
Company's profitability which is anticipated to continue in the foreseeable
future. See "Risk Factors of Global One Distribution & Merchandising Inc. --
Seasonality and Fluctuations in Operating Results."
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The following table sets forth the quarterly results of operation of the
Company for the two years ended December 31, 1994 and 1995, and for the three
months ended March 31, 1996.
<TABLE>
<CAPTION>
QUARTER ENDED
----------------------------------------------------
MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31, TOTAL
1994 1994 1994 1994 1994
----------- --------- ------------- ------------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
QUARTERLY FINANCIAL INFORMATION:
Net sales...................................... $ 7,100 $ 13,741 $ 12,165 $ 9,162 $ 42,168
Gross profit................................... 2,813 5,500 5,070 3,645 17,028
Operating expenses............................. 3,220 4,880 4,464 4,072 16,636
Income (loss) from operations.................. (407) 620 606 (427) 392
Interest expense............................... 129 160 198 198 685
Income (loss) before income taxes.............. (536) 460 408 (625) (293)
Pro forma provision (benefit) for income
taxes......................................... (79) 68 60 (92) (43)
----------- --------- ------------- ------------- ---------
Pro forma income (loss) from continuing
operations.................................... $ (457) $ 392 $ 348 $ (533) $ (250)
----------- --------- ------------- ------------- ---------
----------- --------- ------------- ------------- ---------
</TABLE>
<TABLE>
<CAPTION>
QUARTER ENDED
---------------------------------------------------- QUARTER
MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31, TOTAL ENDED MARCH
1995 1995 1995 1995 1995 31, 1996
----------- --------- ------------- ------------- --------- -----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Net sales............................ $ 7,422 $ 12,566 $ 9,242 $ 8,998 $ 38,228 $ 8,941
Gross profit......................... 3,329 5,566 3,807 3,879 16,581 3,671
Operating expenses................... 3,503 4,333 3,682 3,654 15,172 3,805
Income (loss) from operations........ (174) 1,233 125 225 1,409 (134)
Interest expense..................... 173 209 220 239 841 267
Income (loss) before income taxes.... (347) 1,024 (95) (14) 568 (401)
Pro forma provision (benefit) for
income taxes........................ (70) 206 (19) (3) 114 (85)
----------- --------- ------------- ------------- --------- -----------
Pro forma income (loss) from
continuing operations............... $ (277) $ 818 $ (76) $ (11) $ 454 $ (316)
----------- --------- ------------- ------------- --------- -----------
----------- --------- ------------- ------------- --------- -----------
</TABLE>
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BUSINESS OF GLOBAL ONE
Global One was incorporated in the state of Delaware on April 23, 1996 to
serve as a holding company for the Company and its subsidiaries, and to acquire
Kelly Russell through KRSI Acquisition. Global One organized three subsidiary
corporations under the laws of the state of Delaware: OSP Acquisition, BEx
Acquisition, and KRSI Acquisition. Immediately prior to the KRSI Merger, OSP
will be merged with and into OSP Acquisition and BEx will be merged with and
into BEx Acquisition. At the Effective Time of the KRSI Merger, Kelly Russell
will be merged with and into KRSI Acquisition. The subsidiaries of Global One
following the Closing will be "OSP Publishing, Inc.," "Kelly Russell Studios,
Inc.," and "BEx Corp.," respectively. SDI will continue to be a subsidiary of
OSP Publishing, Inc. following the Transactions.
To date, Global One has not conducted any business except in connection with
the Transactions.
BUSINESS OF THE COMPANY
GENERAL
The Company was incorporated in the State of California in 1989. The Company
has elected S corporation status and, consequently, the Company's earnings have
been taxed at the shareholder level. As a result of the Transactions, the
Company will no longer qualify as an S Corporation.
The Company designs and produces licensed trend merchandise which it markets
for sale in gift and stationary stores, video stores, music stores, toy stores,
bookstores and mass retailers. The Company products consist of posters,
T-shirts, framed and unframed wall decor, buttons, key chains, stickers and
collectible movie scripts. Substantially all of the Company's net sales during
1995 were attributable to products incorporating some licensed material. These
products incorporate primarily licensed images and characters from motion
pictures, television, comic books, music, sports and popular culture. Management
believes that the Company is the leading domestic publisher and distributor of
licensed posters, and a leading distributor of licensed T-shirts, buttons, key
chains, stickers and collectible movie scripts.
The Company 's licenses encompass over 200 properties, including: (i)
Disney's THE HUNCHBACK OF NOTRE DAME, POCAHONTAS and THE LION KING animated
movies, MICKEY UNLIMITED characters and HOME IMPROVEMENT television program;
(ii) Warner Bros.'s LOONEY TUNES characters and BAYWATCH television program;
(iii) other television programs, including FRIENDS, MELROSE PLACE, SEINFELD, and
BEAVIS & BUTT-HEAD; (iv) other motion pictures, including FLIPPER, INDEPENDENCE
DAY, PULP FICTION and BABE; and (v) various musicians and personalities,
including Madonna, Boyz II Men, The Doors, Marilyn Monroe and Whitney Houston.
See "-- Operations and Licensing."
The Company's business is conducted through OSP and OSP's subsidiaries, SDI
and BEx. OSP publishes licensed and non-licensed posters, and also manufactures
Book Bites-TM-, Wallet Cards, movie scripts and other trend gift items. See "--
Products and Operating Subsidiaries." SDI designs and markets a line of
T-shirts, sweatshirts, hats and other apparel to department and specialty stores
and other retail outlets, including mass merchants, based on both licensed and
non-licensed designs. See "-- Products and Operating Subsidiaries." BEx designs
and markets licensed and non-licensed buttons, stickers, key rings and magnets.
See "-- Products and Operating Subsidiaries."
The Company's products incorporate designs created by its staff of artists
and approved by the licensor. See "-- Design and Development." All of the
Company's products are produced according to its specifications by unaffiliated
manufacturers located in the greater Los Angeles area. See
"-- Manufacturing."
The Company's products are sold primarily through in-house sales
representatives and multi-line independent sales representatives and secondarily
through distributors to a diversified group of over 45,000 retail outlets,
primarily in the mass merchandise, gift, music, bookstore, toy, grocery, framing
and video markets. The Company's customers include K-Mart, Wal-Mart, Musicland,
Walden Books,
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Blockbuster Entertainment, Toys R' Us and J.C. Penney. K-Mart and Musicland each
accounted for 10% of the Company's net sales during 1995. International sales,
which are conducted primarily through a network of distributors, comprised 5% of
total sales during 1995. See "-- Sales and Marketing."
BUSINESS STRATEGY
Global One's business strategy is to generate revenue and earnings growth
through further penetration of domestic and international markets for sale of
the Company's existing products, and the introduction of new product lines that
complement and supplement existing product lines which can be sold through the
same channels of distribution.
To accomplish its strategic objectives, Global One may seek to: (i) acquire
producers of other lines of trend merchandise; (ii) increase sales to mass
retailers; (iii) further expand into international markets; (iv) develop and
introduce new and ancillary product categories utilizing existing licenses; (v)
continue to acquire licenses from licensors with whom the Company currently has
relationships and from new licensors; (vi) enter into partnerships with
retailers to develop new products; (vii) develop relationships with "anchor"
retailers who will commit to purchase items in new product categories and (viii)
develop and expand sales of products through "tie in" or "premium" sales. Global
One may engage in future strategic acquisitions if and when such opportunities
arise. It has no present understandings or agreements concerning any acquisition
or merger, however, and is not presently negotiating with respect to any such
matter, other than the proposed KRSI Merger.
Management believes that the KRSI Merger will provide additional licensed
products, particularly sports-related merchandise, for sale in markets presently
served by the Company and will enable Global One to pursue new market
opportunities. It is anticipated that, following the KRSI Merger, Kelly
Russell's products will continue to be sold by Kelly Russell's existing sales
organization and will also be promoted through Global One's sales force.
OVERVIEW OF THE LICENSED MERCHANDISE INDUSTRY
Royalties on sales of licensed merchandise provide an important source of
supplemental revenue for licensors, primarily in the entertainment and sports
industries. According to THE LICENSING LETTER, sales of licensed merchandise in
the U.S. and Canada in 1994 were approximately $102.2 billion. The Company
operates in the trend, novelty or gift segment of the licensed merchandise
industry which management believes accounted for approximately $27.0 billion in
sales in the U.S. and Canada in 1994. Management believes that the growth in
sales of licensed merchandise during the past five years is principally the
result of the rapid growth and globalization of the U.S. motion picture,
television, music and sports industries, during this period. Management believes
that a continuation of these trends and the continued domination of worldwide
markets by the U.S. film and entertainment industries will provide significant
opportunities for future expansion of international sales of licensed
merchandise.
Management believes that trend, novelty and gift items, such as the products
marketed by the Company, have a high turnover rate and provide retailers with
higher returns per square foot than most other retail merchandise. The low cost
of production of the Company's products permit retailers to sell such products
at lower price points that appeal to a wide range of consumers. Disposable wall
products incorporating standard characters, such as MICKEY MOUSE and BUGS BUNNY,
classic icons, such as Marilyn Monroe and James Dean, contemporary and classic
musicians, such as Alanis Morrissette and The Doors, or hit films and television
productions, such as THE LION KING and FRIENDS, are an inexpensive way for
consumers, particularly children, teens and young adults, to express themselves
and identify with their favorite aspects of popular culture. Retailers that sell
the Company's merchandise frequently utilize integrated product displays to
generate a higher volume of "impulse sales" of licensed promotional products.
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<PAGE>
COMPETITION
Management believes that OSP is currently the leading domestic publisher of
licensed posters. OSP's primary competitors in the poster publishing business
are Day Dream Publishing, Inc., Western Graphics, Inc., Portal Publications Co.
and Funky Enterprises. Although the Company is unable to obtain published
financial and other data with respect to production and sales volumes of its
competitors, most of which are private companies, based on their experience and
knowledge of the licensed poster industry, the Company's management believes
that OSP, with annual sales of $25 million, accounts for 25% to 33% of total
annual production volume in the licensed poster industry of between $75 million
and $100 million. The Company's management further believes, based on its
knowledge of the licensed poster industry, that the Company's next largest
competitor has annual sales of approximately $20 million. The Company and its
four major competitors collectively account for an estimated 80% share of the
market for licensed posters.
The Company competes for licenses with other producers of licensed
merchandise on the basis of its multiple product categories, such as posters,
T-shirts, framed and unframed wall decor, buttons, stickers, key chains and
collectible movie scripts. Management believes the use of multiple product
categories, which often can be sold through the same retail facility, is
attractive to licensors because it provides a more efficient distribution and
more royalties based upon a popular licensed property. In addition, the Company
offers a large and diversified distribution network. The variety of products
offered by the Company, the quality and experience of its art department and its
strong relationships with key licensors and major studios have enabled the
Company to acquire a portfolio of approximately 200 major licenses.
The Company competes for retail floor space on the basis of its portfolio of
licenses, which allow it to offer the greatest selection of titles. The Company
has approximately 1,100 shelf keeping units ("SKUs") while its competitors are
believed to offer only between 200 and 400 SKUs. The Company has in place 18,000
poster racks of varying sizes at its customers, and the Company's sales staff
provides ordering and stocking services. In addition, the Company's multiple
product lines enable it to provide retailers with integrated product displays
incorporating each subsidiaries' products, thus offering retailers a more
effective way to capitalize on a popular trend.
PRODUCTS AND OPERATING SUBSIDIARIES
The Company publishes and distributes licensed posters, T-shirts, framed and
unframed wall decor, buttons, key chains, stickers and collectible movie scripts
through OSP, SDI and BEx. Substantially all of the Company's net sales during
1995 were attributed to products incorporating some licensed material. The
following table sets forth the Company's net sales by subsidiary:
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH
YEAR ENDED DECEMBER 31, 31,
---------------------------------------------------------------------------- ------------------------
1993 1994 1995 1995
------------------------ ------------------------ ------------------------ ------------------------
AMOUNT % AMOUNT % AMOUNT % AMOUNT %
----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
OSP................. $ 19.5 51.2% $ 23.6 55.9% $ 25.2 66.0% $ 5.2 70.3%
SDI................. 15.5 40.7 11.1 26.3 10.1 26.4 1.5 20.3
BEx................. 3.1 8.1 7.5 17.8 2.9 7.6 0.7 9.4
----- ----- ----- ----- ----- ----- --- -----
Company............. $ 38.1 100.0% $ 42.2 100.0% $ 38.2 100.0% $ 7.4 100.0%
----- ----- ----- ----- ----- ----- --- -----
----- ----- ----- ----- ----- ----- --- -----
<CAPTION>
1996
------------------------
AMOUNT %
----------- -----------
<S> <C> <C>
OSP................. $ 4.6 51.7%
SDI................. 4.1 46.1
BEx................. 0.2 2.2
--- -----
Company............. $ 8.9 100.0%
--- -----
--- -----
</TABLE>
OSP
OSP develops and markets posters incorporating primarily licensed images and
characters from motion pictures, television, animation, music, and popular
culture. OSP's product lines are designed principally around four main
categories of consumers: pre-teens, teens, college students and adults.
Non-licensed posters published by OSP include generic posters of models, cars,
airplanes and popular phrases. OSP's typical poster consists of a color image
printed on 23"x 35", 80 lb. paper.
OSP also develops and markets products utilizing licensed and non-licensed
material, including Wallet Cards, Book Bites-TM-, movie scripts and other trend
gift items to independent retailers. Wallet Cards are informative cards shaped
like credit cards and Book Bites-TM- are die-cut bookmarks bearing images of
OSP's licensed characters.
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In order to expand OSP's products aimed at adults, OSP developed AVALON
EDITIONS-TM- in March 1995 and CLASSIC COMMEMORATIVES-TM- in August 1995. AVALON
EDITIONS-TM- and CLASSIC COMMEMORATIVES-TM- are contemporary framed and unframed
wall decor lithographed on premium grade, museum weight paper. AVALON
EDITIONS-TM- feature reproductions of favorite fine art pieces, generic themes
and humorous renditions of fine art. CLASSIC COMMEMORATIVES-TM- are newly
created proprietary art featuring standard licensed characters, such as MICKEY
MOUSE. OSP's main poster and trend product lines generally retail for between
$5.00 and $10.00 each, while movie scripts, AVALON EDITIONS-TM- and CLASSIC
COMMEMORATIVES-TM- generally retail for approximately $20.00 each.
OSP's five largest licensors based on 1995 net sales were Disney (26% of net
sales), Warner Bros./ LCA (19%), Sony (9%), Winterland Productions (6%), and No
Fear (4%). OSP's leading products during the past 12 months have included
posters and other items based on characters and images from THE LION KING,
POCAHONTAS, LOONEY TUNES, Marvel Comics and D.C. Comics, various musical acts,
including Madonna and the Doors, and the No Fear brand. During 1996, OSP has
introduced or intends to introduce new posters based on THE HUNCHBACK OF NOTRE
DAME, SPACE JAM, FLIPPER, BANANAS IN PAJAMAS, Alanis Morrissette and
INDEPENDENCE DAY.
SDI
SDI designs and markets licensed and non-licensed T-shirts, sweatshirts,
mugs, hats and boxer shorts in the $20.00 and under retail price range for sale
primarily in department stores, such as J.C. Penney, gift shops and music
stores, such as Musicland, apparel stores, such as Miller's Outpost and
Spencers, and mass retailers such as Wal-Mart and K-Mart. Such products
generally retail at the $15.00 price level.
SDI's five largest licensors based on 1995 net sales were Anheuser-Busch
(24.4%), Fox Television (17.4%), Disney (11.7%), Viacom (11.7%) and MTV Networks
(7.0%). SDI's leading products during the past 12 months have included T-shirts
and other items based on characters and images from Anheuser-Busch's Budweiser
beer commercials ("I LOVE YOU, MAN" and BULLFROGS), Disney's HOME IMPROVEMENT,
BEAVIS & BUTT-HEAD and FRIENDS. During 1996, SDI has introduced or intends to
introduce new products based on INDEPENDENCE DAY and X-FILES, among others.
BEX
BEx designs and markets licensed and non-licensed buttons, key rings and
stickers for sale as novelty and impulse purchase items in a wide range of
retail stores, including gift-oriented card shops, mass merchandisers, music and
video stores and convenience stores. Non-licensed products include buttons and
key rings bearing phrases or slogans, seasonal buttons and tourist/souvenir
buttons targeted at specific regions. Retail prices for BEx's products range
from $1.29 to $3.99. Sales of buttons accounted for 45% of BEx's net sales in
1995 and key rings accounted for 33% of BEx's net sales. Other products produced
by BEx include licensed and non-licensed stickers and magnets.
BEx's four largest licensors based on 1995 net sales were Disney (26% of net
sales), Warner Bros./ LCA (25%), Jim Benton (13%) and Viacom (7%). BEx's leading
products during the past 12 months have included items based on characters and
images from POCAHONTAS, BAYWATCH and FRIENDS. During 1996, BEx has introduced or
intends to introduce new products based on THE HUNCHBACK OF NOTRE DAME, BANANAS
IN PAJAMAS and LOONEY TUNES standard characters.
LICENSING
The Company's licenses permit the Company to produce and market products
based on characters and images which already possess their own popular identity
through media exposure such as television, films, cartoons, comic books and
music. Most licenses permit the Company to develop multiple products through its
various operating subsidiaries. In addition to licenses for sales in the
domestic market, the Company is increasingly pursuing international licenses for
sales in Canada, Europe, and the Pacific Rim. International rights exist in
approximately 10% of all licenses.
Licensed products include Promotional Properties, Standard Properties and
seasonal properties. Promotional Properties include products containing scenes
or images connected with a current film,
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television program or popular performer, such as THE HUNCHBACK OF NOTRE DAME,
HOME IMPROVEMENT and Madonna. Standard Properties include products based on
standard characters, including MICKEY MOUSE and LOONEY TUNES characters such as
BUGS BUNNY, TAZ, FOGHORN LEGHORN and MARVIN THE MARTIAN. Seasonal properties
include products consisting of characters or images with a holiday or seasonal
theme. Standard Properties typically generate relatively consistent sales over
time while Promotional Properties typically involve higher initial sales but
shorter product life-spans. Licensed promotional products are those that
accompany a major promotional campaign, typically timed to coincide with the
theatrical or video release of a large-budget film. Generally, three to six such
promotional campaigns occur during a fiscal year, and the shelf life of licensed
promotional products is typically 60-120 days. Seasonal products provide
additional sales during holiday periods. Sales of Promotional Properties also
tend to be seasonal, due to the seasonality of major theatrical releases of
films. Film studios typically release the majority of major films during the
months of May through September, which has historically resulted in higher sales
volumes by the Company during this period. The second and third quarters of 1995
and 1994 accounted for 57.0% and 61.4% respectively, of total annual sales.
The successful marketing of Promotional Properties generally requires the
Company to anticipate and evaluate the popularity of licensed properties, most
of which are media related, and to capitalize on the success of such properties
in a timely manner. A determination to acquire a license must frequently be made
before the commercial introduction of the property in which a licensed character
appears. The licensing staff must evaluate many criteria, including the actors,
script, actual footage, demographics and the licensor's marketing budget to
determine whether to acquire a new license. As Promotional Properties are
typically marketed successfully only for a limited period of time, the success
of the Company's marketing program is dependent upon its ability to continually
acquire new, popular promotional licenses. As the industry leader, potential
licensors typically contact the Company directly to negotiate a new license, in
most cases 6 to 18 months before release of a film or other project. In cases
where the Company does not own a license for a hit property, the Company may
seek to distribute such products for its competitors.
Royalties to the Company's licensors typically range from 10% to 25% of net
sales, with an average consolidated royalty rate of 12.3% in 1995, 13.7% in 1994
and 12.9% in 1993. Royalty rates during 1995 for sales by OSP, SDI and BEx
averaged 13.9%, 8.9% and 10.3% of net sales, respectively. Royalty rates tend to
be lower to the extent sales are made directly to retailers rather than to
distributors. See "-- Sales and Marketing." License arrangements generally
require the payment of non-refundable advances and guaranteed minimum royalties.
As a result of increased competition for licenses, Global One may, in the
future, be required to pay licensors higher royalties and higher minimum
guaranteed payments in order to obtain attractive properties for marketing
through its existing and new product lines.
It is customary in the licensing industry to provide for the verification of
royalty payments to licensors through audits of sales records on demand. As a
result of such audits, royalty obligations may be subject to adjustment. As a
result of 1994 audits, the Company and the licensors discovered that over a
period of several years, certain royalties had been miscalculated. In addition,
management believes that a significant amount of adverse audit findings in the
past were attributable to errors in data entry with respect to applicable
royalty rates, depending on the territory into which sales were made and the
nature of customers as distributors or retailers. Adjustments due to adverse
audit findings applicable to 1994 and 1993 were $143,000 and $148,000,
respectively. These amounts are reflected in the Company's Consolidated
Financial Statements. The Company's management information system has been
revised to require the advance identification of customers, territories and
royalty rates to avoid data entry errors in the future. However, no assurances
can be given that adverse audit findings will not be found in the future, or
that material adjustments will not be required, either of which could have a
material adverse effect on Global One's results of operations.
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Typically, the Company's licenses are for a period of two years. Major
licensors in the entertainment and media industries generally do not grant
exclusive licenses, and most of the Company's major licenses are non-exclusive.
Management believes that major licensors generally do not grant competitive
licenses within a territory largely due to the limited life-span of promotional
properties, the transaction costs associated with granting duplicate licenses
and the fact that distribution by a single company builds better demand for the
product. However, no assurances can be given that such licensors will not grant
competing licenses in the future. Management believes that the Company maintains
excellent relationships and an excellent reputation with its licensors.
The Company's portfolio of over 200 major licenses includes the following
properties:
DISNEY ENTERPRISES INC.
- - The Hunchback of Notre Dame
- - Mickey Unlimited
- - Pocahontas
- - The Lion King
- - Disney Babies
- - 101 Dalmatians
WARNER BROS./LCA
- - Looney Tunes
- - Space Jam
- - Films & Television
ANIMATION
- - Marvel Comics
- - D.C. Comics
- - Superman
- - The Adventures of Batman & Robin
- - Betty Boop
- - Aeon Flux
- - Peanuts
TELEVISION
- - The X-Files
- - Bananas in Pajamas
- - Baywatch
- - Star Trek: Original Series
- - Beavis & Butt-head
- - Melrose Place
- - Friends
- - Lois & Clark: The New Adventures
BRANDS
- - No Fear
- - Budweiser
- - Hawaiian Tropic
- - Caesars' Palace
- - Maui & Sons
FILMS
- - Flipper
- - Barb Wire
- - Pulp Fiction
- - Batman Forever
- - Legends of the Fall
- - Babe
- - Desperado
- - Ace Ventura II
- - Independence Day
- - Casper
- - Star Trek Generations
- - Goldeneye
- - Forrest Gump
- - The Wizard of Oz
- - Mission Impossible
- - Gone With The Wind
WINTERLAND PRODUCTIONS
- - Alanis Morrisette
- - The Doors
- - Boyz II Men
- - Madonna
- - Jerry Garcia
- - Led Zeppelin
- - Weezer
- - Freddie Mercury
- - Marilyn Manson
- - Michael Bolton
- - Hole
- - Reba McEntyre
- - Beastie Boys
- - Whitney Houston
- - Jimi Hendrix
- - The Who's Tommy
- - Ice T
- - Bruce Lee
PERSONALITIES
- - Babe Ruth
- - Martin Luther King
- - James Dean
- - The Doors
- - Marilyn Monroe
- - Pamela Anderson
- - Lou Gehrig
- - Claudia Schiffer
- - Bob Marley
- - Jenny MacCarthy
- - Selena
- - Elvis
- - Bruce Lee
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DESIGN AND DEVELOPMENT
The imagery for the Company's products is custom designed from concept to
final art by the Company's staff of 12 in-house artists and freelance artists
utilizing computerized design techniques. The art department also designs
integrated retail displays utilizing the licensed properties. The Company's art
department is equipped with state-of-the art production facilities, providing
the Company total quality control over the entire production process, including
the actual layout and design of products.
Artwork for licensed products is typically subject to approval by the
licensor. Licensors also typically retain the right to approve any packaging,
promotional material or advertising used in connection with a particular
license. Such approval is in the licensors' sole discretion and may be time-
consuming. In many cases, the Company's artists utilize style guides furnished
by the licensor. Where style guides are not available, the art department staff
reads scripts or reviews film clips to gain insight into the personality of a
character. Artists create concept sketches that are presented to the licensor
for discussion and direction before final art work is prepared. Management
believes that the art department's experience in working with the Company's
licensors enables department staff to prepare illustrations, sketches and
drawings that are more likely to be acceptable to the licensor, and that this
experience provides the Company with an advantage over other producers of
licensed products because the Company is typically able to produce a final
product that satisfies the approval criteria of the Company's licensors in a
more timely fashion than other producers.
MANUFACTURING
The Company manufactures substantially all of its products through
unaffiliated manufacturers located in the greater Los Angeles area. Decisions
relating to the choice of manufacturer are based on price, quality of
merchandise, reliability and the ability to meet timing requirements for
delivery. OSP is a party to a contract with a poster printer which obligates OSP
to utilize the printer for at least $3.8 million in printing work at market
rates through June 30, 1997, which amount is expected to constitute
approximately 60% of total outside printing costs during the term of such
contract. OSP's management believes that numerous other manufacturers are
available to produce its products should its existing manufacturers be unable to
do so, and that Global One would be able to obtain high quality merchandise at
competitive prices without significant delays. However, the inability of Global
One to meet its delivery requirements could result in the termination of some of
its licenses and no assurances can be given that this will not occur. Finished
products are returned to the Company's Bell, California warehouse, where
products are packaged for final distribution. Posters are distributed either in
rolled form, shrink-wrapped on poster board to retailers or shipped flat on
pallets to distributors. The minimum poster purchase for manufacturing is
typically 4,000 units, and average poster manufacturing orders during 1995 were
8,000 units.
The principal raw materials used in the production and sale of the Company's
products are paper products, finished T-shirts and plastics. Raw materials are
generally purchased by the manufacturers who deliver completed products to the
Company. Paper products and plastics are typically produced in the United
States, while finished T-shirts are produced both domestically and in East Asia.
In certain circumstances, the Company purchases paper and shrink wrap directly
for the packaging of its finished products. The Company believes that an
adequate supply of raw materials used in the manufacture and finishing of its
products are readily available from existing and alternative sources at
reasonable prices.
SALES AND MARKETING
The Company distributes its products directly to retailers primarily through
approximately 80 to 100 commissioned in-house and multi-line, independent sales
representatives, and through 10 distributors, in the United States. A network of
over 100 distributors are used to sell products to Canada, Europe, Japan, Hong
Kong, Australia, New Zealand, Mexico and South America. Approximately 75% of net
sales are directly to retailers, including corporate buyers for national chains
and individual stores, and 25% of net sales are to distributors. OSP's sales
force reports to three regional managers,
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who are under the direction of OSP's Vice President of Sales. SDI and BEx each
have independent sales representatives who sell their products. In addition,
OSP's sales representatives sell SDI and BEx merchandise.
The Company distributes to over 45,000 retail accounts worldwide. The
Company's management believes that no single retailer or group of retailers
accounts for a significant portion of the market for licensed posters, T-shirts
and buttons. The Company's distribution channels include general retail stores,
gift and print shops, video and record stores, toy stores, comic book and
baseball card stores, mass retailers, department stores, supermarkets, framing
shops, drug stores, mail-order and home shopping company and school book clubs.
International sales comprised 5% of total sales during 1995.
The Company distributes its products to the following chain stores, among
others:
<TABLE>
<CAPTION>
MASS MARKET MUSIC/VIDEO GIFT/TOY/BOOK
<S> <C> <C>
K-Mart Musicland Toys R' Us
Meijer Transworld Kay Bee Toys
Target Wherehouse Claire's Boutiques
Wal-Mart Tower Records Waldenbooks
Fred Meyer Blockbuster Spencers
Shopco Hollywood Video Coach House Gifts
<CAPTION>
CRAFT
DRUG/SUPERMARKET DEPARTMENT STORE/HOME SHOPPING STORES/CATALOGS
<S> <C> <C>
Osco's Macy's Michael's
Payless J.C. Penney Aaron Brothers
Albertson's QVC Standard Brands
Smiths Home Shopping Network Fingerhut
Randalls Hammacher & Schlemmer Deck the Walls
</TABLE>
The Company has placed over 18,000 proprietary poster display racks of
various sizes in retail establishments. The Company's sales force typically
visits retailers every one to six weeks to ensure that display racks are
adequately stocked with the Company's products, and to offer promotional
materials and integrated product displays for upcoming releases. The Company
participates in the electronic data interchange ("EDI") program maintained by
many of its largest customers, including Toys R' Us, Wal-Mart, K-Mart, Target
and J.C. Penney. The EDI program allows the Company to monitor store inventory
and schedule production to meet anticipated reorders, which are generally
fulfilled within 3 days. Additionally, the Company has expanded its in-store
service capabilities by offering a custom retail management system, which tracks
both promotional program and individual product sales, enabling the Company and
the retailer to more accurately evaluate sales per square foot and annual sales.
This enables the Company to maximize the productivity of each individual retail
location.
The Company also sells its products through mail-order catalogs and
promotional and merchandising tie-ins with fast-food chains and other
organizations. The Company has established a special premium and promotion
department to focus on such sales. Premium sales typically involve nonretail
sales of properties to promotional partners of a licensor, including companies
such as Food Maker (Jack-in-the-Box) and Pillsbury, often in conjunction with a
rebate or other special pricing. Premium sales constituted approximately 5% of
OSP's net sales during 1995. The Company's management believes that the premium
department will account for a larger percentage of sales during 1996. However,
no assurances can be given that premium sales will constitute a significant
percentage of Global One's net sales in the future.
The Company has also secured the rights from Sprint to distribute telephone
cards with licensed graphics as a new premium product. In addition, Global One
is considering establishing a website on the Internet with full color images of
Global One's products as an additional catalog-type distribution channel for its
products.
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RETURNS POLICY
The Company accepts product exchanges for credit from its retail accounts on
all posters, buttons and key chains for which there is a paid invoice.
Management believes that the Company's policy of exchanges for credit ensures
that unsuccessful titles will be replaced with titles that may generate sales.
During 1995, the average returns rate was 12%. The Company generally obtains a
credit on royalties and commissions paid on product exchanges. Exchanges are not
accepted from distributors, framers, international or premium sales. In general,
T-shirts are not returnable, except where the merchandise is flawed.
BACKLOG
Due to the promotional nature of the Company's licensed products, the
limited selling period for promotional materials and the Company's ability to
quickly fill orders, the Company's customers order backlog has not been
material.
GOVERNMENT REGULATION; TARIFFS AND DUTIES
In the United States, the Company is subject to the provisions of, among
other laws, the Federal Consumer Product Safety Act and the Federal Hazardous
Substances Act (the "Acts"). The Acts empower the Consumer Product Safety
Commission (the "Consumer Commission") to protect the public against
unreasonable risks of injury associated with consumer products, including toys
and other articles. Some of the Company's products may be deemed to be toys. The
Consumer Commission has the authority to exclude from the market articles which
are found to be hazardous and can require a manufacturer to repair or repurchase
such articles under certain circumstances. Any such determination by the
Consumer Commission is subject to court review. Violations of the Acts may also
result in civil and criminal penalties. Similar laws exist in some states and
cities in the United States and in many jurisdictions throughout the world. In
addition, the Company maintains product liability insurance in the amount of
$2,000,000.
EMPLOYEES
As of December 31, 1995, the Company had 142 full time employees, including
30 employees at BEx and 38 employees at SDI. During periods of high production
volume (May through September), the Company typically hires up to 100 additional
temporary employees to assist in production. The Company's employees are not
covered by any collective bargaining agreements. The Company believes its
relationship with its employees is satisfactory.
PROPERTIES
The Company is headquartered in a 105,000 square foot leased facility
located at 5548 Lindbergh Lane, Bell, California 90201. The majority of the
Company's operations, such as corporate offices, in-house sales staff, art
department, accounting and warehouse operations, including all of OSP's
operations and BEx's administrative and warehousing functions, are based at such
location. BEx also leases approximately 3,000 square feet of offices at 200
Diversion, Rochester, Michigan 48307. SDI conducts all of its operations out of
approximately 20,000 square feet of leased office space at 10615 Vanowen St.,
Burbank, CA 91505.
LEGAL PROCEEDINGS
The Company is from time to time a party to routine litigation incidental to
its business. Based upon the advice of its counsel, management does not believe
that the outcome of any litigation, individually or in the aggregate, will have
a material adverse effect on Global One's results of operations or financial
condition.
TRADEMARKS
The Company utilizes several trademarks and logos in connection with the
marketing and sale of its products. The Company believes that the strength of
the Company's trademarks and logos are of considerable value to its business and
intends to continue to protect them. At May 1, 1996, the
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Company had one United States registered trademark and applications pending for
an additional three trademarks. To management's knowledge, none of these
trademarks is the subject of a legal proceeding.
MANAGEMENT OF GLOBAL ONE
DIRECTORS AND EXECUTIVE OFFICERS
Global One's By-laws provide for from one to nine directors, with the exact
number to be determined, from time to time, by resolution of the Board of
Directors. Currently, there are two directors of Global One, Joseph C. Angard
and Michael A. Malm. Upon consummation of the Transactions, the Merger Agreement
requires the Board to increase the size of the Board to four and to appoint Mark
S. Hauser and Thomas R. King to fill the vacancies created. Global One's
Certificate of Incorporation states that the Board of Directors shall be divided
into three classes of directors, with the directors in each class elected for
three-year staggered terms except for the initial directors. The terms of the
Board will expire at the annual meetings of shareholders in 1997, 1998 and 1999.
Officers will serve at the pleasure of the Board of Directors, subject to
restrictions set forth in employment agreements to be entered into. See "--
Employment Agreements." Set forth below is certain information with respect to
the two persons who are currently directors of Global One, and the two other
persons who will be directors and executive officers of Global One following the
Transactions.
JOSEPH C. ANGARD, 55, is a Class III Director, Chairman, Chief Executive
Officer and President of Global One. Mr. Angard is also Chairman and Chief
Executive Officer of OSP. Mr. Angard joined OSP, formerly One Stop Posters, in
1983 as an independent consultant to acquire licenses and advise on product
development. In 1989, Mr. Angard led the senior management buyout of OSP. Prior
to joining One Stop Posters, Mr. Angard served as director of licensing for
Entertainment Merchandise Marketing Corp., a tour merchandising company. His
experience also includes over eight years with national talent agencies,
including William Morris and International Creative Management. Mr. Angard
received a B.A. degree in English and History from Syracuse University.
MARK S. HAUSER, 38, will be a Class II Director of Global One. Mr. Hauser is
a founder and Managing Director of Tamarix Capital Corporation, an international
investment and merchant banking firm. Previously, Mr. Hauser was a Managing
Director at Hauser, Richard & Company and Ocean Capital Corporation, both
private international investment banking firms. Prior to joining Ocean Capital
Corporation in 1986, Mr. Hauser was a corporate finance and banking attorney at
the New York office of Rogers & Wells. Before joining Rogers & Wells, Mr. Hauser
worked as a corporate and tax solicitor for Simons & Baffsky in Sydney and for
Simmons & Simmons in London. Mr. Hauser is Vice Chairman of Holmes Protection
Group, a security alarm systems company; a Director of ICC Technologies, a high
technology air conditioner manufacturer; a Director of EA Industries, Inc., an
electronic contract manufacturing company; and a Director of Direct Language
Communications, Inc., a multilingual communications services company. Mr. Hauser
is a member of the New York Bar and is admitted to practice law as a solicitor
to the Supreme Court of New South Wales in Australia. He has economics and law
degrees from Sydney University and a Master of Law degree from the London School
of Economics and Political Science.
THOMAS R. KING, 55, has served as a director of Kelly Russell since March
1995 and upon consummation of the Transactions will serve as a Class II Director
of Global One. Mr. King is a shareholder of Fredrikson & Byron, P.A., which has
served as general counsel to Kelly Russell including legal matters in connection
with the Transactions. Mr. King has been engaged in the private practice of law
since 1965. Mr. King serves as a director of Sunrise Resources, Inc. and
DataKey, Inc.
MICHAEL MALM, 33, is a Class III Director and Chief Operating Officer of
Global One and President of OSP. Mr. Malm joined One Stop Posters in 1984 as
Director of Sales and was promoted to Vice President of Sales and Marketing in
1987. Under his management, the Company established a
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national sales network which contributed to the growth of the Company's retail
account base. Prior to 1984, Mr. Malm founded and owned Golden Era Posters, a
college poster distribution company. Mr. Malm studied economics at the
University of Southern California.
STANLEY DESANTIS, 42, is the President of Stanley DeSantis, Inc. Mr.
DeSantis is an accomplished actor and designer. Mr. DeSantis has been designing
successful apparel for over twenty years. His design credits include: the
costume graphics for the Los Angeles Olympics ceremonies, the 1984 Presidential
Inauguration, and the 100th anniversary of Coca-Cola. Mr. DeSantis founded
Stanley DeSantis, Inc. in 1972. Mr. DeSantis graduated with a B.A. in Performing
Arts from New York University.
GEORGE J. VRABECK, 34, will serve as Executive Vice President of Global One
after the Closing. Mr. Vrabeck has served as Kelly Russell's President and as a
director since November 1994 and as its Chief Executive Officer since February
1996. Mr. Vrabeck also served as its Chief Financial Officer from March 1995 to
February 1996, as Chief Executive Officer from November 1994 to October 1995 and
as Chief Operating Officer from October 1994 to November 1994 and from October
1995 to February 1996. Mr. Vrabeck served as President of Minneapolis Coffee
Corporation, a group of specialty coffee retail stores, from January 1991 to
July 1994. He was an associate with Morgan Stanley & Co. Inc., an international
investment banking firm, from June 1989 to January 1991, and he was a Senior
Staff Member, of Ernst & Young from June 1983 to July 1987. Mr. Vrabeck is a CPA
and received his M.B.A. from the University of Michigan, J.D. from the
University of Minnesota Law School and B.S. in accounting from Long Island
University.
CHRISTOPHER B. LUCAS, 43, will be Vice President of Finance and Chief
Financial Officer of Global One. Mr. Lucas joined OSP in 1993 as Vice President,
Finance and Chief Financial Officer of OSP. Immediately prior to joining OSP, he
worked as a consultant providing financial and operational assistance to
emerging growth businesses. From 1990 to 1992, Mr. Lucas worked for Exel
Financial, as Vice President, providing expansion and acquisition capital to
growth companies. From 1986 to 1990 he served as Vice President of Finance and
Administration at Peripheral Systems, Inc., a hardware/ software integrator. Mr.
Lucas earned his M.B.A. at the University of Southern California and B.S. in
Mechanical Engineering from the University of California, Los Angeles.
MIKE BERIN, 44, is currently and will continue to be Vice President of Sales
of OSP. Mr. Berin joined OSP in 1993. Mr. Berin is responsible for overseeing
all sales operations. From 1985 to 1993, Mr. Berin was a Partner at M&A
Marketing, a distributor of posters, video, and other licensed products to
supermarkets, drug stores, and mass retailers. Prior to 1985, Mr. Berin worked
for his family's wholesale clothing business as well as for Adderton Food
Brokerage. Mr. Berin graduated with a B.A. in Business Administration from
Miami-Dade College.
COMPENSATION OF BOARD OF DIRECTORS
It is Global One's intention to pay fees to its non-officer directors for
serving on the Board of Directors and for their attendance at Board and
committee meetings. Global One will pay each non-officer director a retainer of
$5,000 per annum, plus $1,500 per board or committee meeting attended. Global
One will not pay directors who are also executive officers for attending Board
or committee meetings.
In addition, non-officer directors will receive annual grants of 5,000 stock
options under the Stock Option Plan. Non-officer directors will also be
reimbursed for expenses incurred on behalf of Global One.
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EXECUTIVE COMPENSATION
SUMMARY OF CASH AND CERTAIN OTHER COMPENSATION
The following table sets forth certain summary information concerning
compensation paid or accrued by OSP for the fiscal year ended December 31, 1995,
to or on behalf of the five executive officers of OSP whose compensation in 1995
exceeded $100,000. George J. Vrabeck, President and Chief Executive Officer of
Kelly Russell will, upon consummation of the Closing, serve as Global One's
Executive Vice President. See "-- Directors and Executive Officers."
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL COMPENSATION
-------------------------------------------------
ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS COMPENSATION
- -------------------------------------------- --------- ----------- --------- --------------
<S> <C> <C> <C> <C>
Joseph C. Angard -- Chairman and Chief 1995 $ 250,000 $ 24,787 $ 1,588(1)
Executive Officer
Michael A. Malm -- President 1995 250,000 -- 3,254(1)
Michael Berin -- Vice President/Sales 1995 150,000 -- 5,400(2)
Christopher B. Lucas -- Vice President -- 1995 125,000 -- 2,938(1)
Finance, Chief Financial Officer
Stanley DeSantis -- President, Stanley 1995 250,000 73,000 3,918(1)
DeSantis, Inc.
</TABLE>
- ------------------------
(1) Represents the value of a company leased automobile.
(2) Represents a $3,000 auto allowance and a $2,400 home office allowance.
EMPLOYMENT AGREEMENTS
Effective upon the Closing, Global One has entered into a three-year
employment agreement with Joseph C. Angard as Chairman, Chief Executive Officer
and President, pursuant to which Mr. Angard will receive a base salary of
$275,000 per year plus the ability to earn a bonus of up to $137,500 per year
based upon performance criteria established by the Board of Directors at the
beginning of each year. In addition, Global One will grant to Mr. Angard options
to purchase up to 300,000 shares of Global One Common Stock at $1.50 per share,
vesting in the amount of 100,000 options per year at the end of each of the
first three years during the term of the agreement and exercisable for five
years from the time of vesting.
Effective upon the Closing, Global One has entered into a three-year
employment agreement with Michael A. Malm as Chief Operating Officer of Global
One and President of OSP, pursuant to which Mr. Malm will receive a base salary
of $275,000 per year plus the ability to earn a bonus of up to $82,500 per year
based upon performance criteria established by the Board of Directors at the
beginning of each year. In addition, Global One will grant to Mr. Malm options
to purchase up to 300,000 shares of Global One Common Stock at $1.50 per share,
vesting in the amount of 100,000 options per year at the end of each of the
first three years during the term of the agreement and exercisable for five
years from the time of vesting.
The Company has entered into an agreement (the "DeSantis Agreement") with
Stanley DeSantis, President of SDI, which contemplates that the parties will
execute a longform agreement incorporating the terms of the DeSantis Agreement
and that Mr. DeSantis will enter into a four-year employment agreement with SDI.
Pursuant to the DeSantis Agreement, Mr. DeSantis will receive a base salary of
$250,000 per year plus the ability to earn a bonus based upon the achievement of
specified net sales by SDI. Mr. DeSantis will be President and have control of
the operations and management of SDI, subject to the control of the Board of
Directors of SDI as to matters required by law to be approved by the Board. In
addition, the DeSantis Agreement provides that Mr. DeSantis will
79
<PAGE>
have the option, subject to terms and conditions, to repurchase the Company's
51% interest in SDI at a price to be determined based on the previous four years
of operating income at SDI. A similar repurchase option is provided to the
Company if Mr. DeSantis elects to offer his 49% interest to the Company. In
addition, the DeSantis Agreement provides that DeSantis will accrue stock
options to purchase OSP Common Stock to begin vesting in the event the Company
accepts DeSantis' offer of his interest in SDI. Such options will terminate
should Mr. DeSantis exercise his repurchase option. The DeSantis Agreement
further provides that Mr. DeSantis will receive certain royalties, including a
2% royalty for any original artwork created by Mr. DeSantis and a 3% royalty for
the Company's use of the Stanley DeSantis brand name in the event that the
Company has purchased Mr. DeSantis' interest in SDI and Mr. DeSantis is
terminated or elects not to renew his contract with SDI.
Effective upon the Closing, Global One has entered into a three-year
employment agreement with George J. Vrabeck as Executive Vice President,
pursuant to which Mr. Vrabeck will receive a base salary of $200,000 per year
plus a guaranteed bonus of $25,000 payable 90 days after the end of the fiscal
year, plus the ability to earn an additional bonus of up to $25,000 per year
based upon performance criteria established by the Board of Directors at the
beginning of each year. In addition, Global One will grant to Mr. Vrabeck
options to purchase up to 300,000 shares of Global One Common Stock at $1.50 per
share, with 100,000 options vesting per year at the end of each of the first
three years during the term of the agreement and exercisable for five years from
the time of vesting.
Effective upon the Closing, Global One will grant to Mr. Lucas options to
purchase up to 250,000 shares of Global One Common Stock at $1.50 per share,
with 100,000 options vesting immediately and 150,000 vesting in the amount of
50,000 options per year on each of the first three anniversaries of the date of
the grant and exercisable for five years from the time of vesting.
Effective upon the Closing, Global One will grant to Mr. Berin options to
purchase up to 125,000 shares of Global One Common Stock at $1.50 per share,
with 50,000 options vesting immediately and 75,000 vesting in the amount of
25,000 per year on each of the first three anniversaries of the date of the
grant and exercisable for five years from the time of vesting.
In addition to the benefits described above for Messrs. Angard, Malm,
DeSantis, Vrabeck, Lucas and Berin, each of the agreements referenced above will
provide for certain benefits to the employees, including an automobile
allowance, reimbursement of business expenses, vacation time, life insurance
premium payments and disability benefits.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Pyramid Licensing is a corporation of which Global One's Chairman and Chief
Executive Officer and Global One's Chief Operating Officer are the sole
shareholders. Pyramid Licensing represents licensors of properties, some of whom
may in the future license such properties to Global One. The Company has agreed
to guarantee Pyramid's performance under a lease agreement and to pay some of
its expenses. The annual amount of the lease is $46,000, and the Company has,
through June 30, 1996, paid $53,000 in expenses, mainly salaries, on behalf of
Pyramid Licensing. Although no definitive proposal has been discussed or agreed
upon, it is possible that Pyramid Licensing may become a subsidiary of Global
One at some point after the Closing.
In addition, pursuant to the DeSantis Agreement Mr. DeSantis has granted
Pyramid Licensing a right of first refusal to represent Mr. DeSantis with regard
to any original artwork and to pay Pyramid Licensing a commission of 30% plus
reimbursement of expenses for domestic use and a commission equal to 10% plus
any foreign agent's commission, not to exceed 40%, for international use.
Global One's Chairman and Chief Executive Officer has a 26% interest in
Press One, a printing company, the majority of which is owned by the former
owner of the Company. The Company purchased approximately $997,000, $1,355,000
and $917,000 of printing services from Press One in 1995, 1994 and 1993,
respectively. As of December 31, 1995 and 1994, the Company owed approximately
$278,000 and $423,000, respectively to Press One.
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<PAGE>
OSP has an agreement with an outside agency of sales representatives which
provides marketing services to OSP. Pursuant to such agreement, the agency paid
a consulting fee to Joseph C. Angard and Michael A. Malm based upon the amount
of commissions paid to the agency by OSP. During 1995, approximately $11,500 and
$86,000 were paid by the agency to Messrs. Angard and Malm, respectively, under
such arrangement. It is anticipated that this agreement will be terminated by
OSP prior to the Reorganization.
OSP has entered into an agreement (the "Tamarix Agreement") with Tamarix
Capital Corporation ("Tamarix"), a company of which Mark S. Hauser, a nominee
for director of Global One, is a principal. Under the Tamarix Agreement, Tamarix
assisted OSP with, among other things, the Private Placement and will receive a
fee equal to 5% of the gross proceeds raised in the Private Placement plus
warrants to purchase Global One Common Stock at an exercise price of $1.50 per
share in an amount equal to 5% of the shares owned by the OSP Shareholders
immediately after the Closing.
OSP has entered into agreements (the "Advisory Agreements") with Tamarix and
Mr. Hauser (the "Advisors") commencing at the Effective Time and continuing for
periods of 12 months and 36 months, respectively, unless sooner terminated,
pursuant to which the Advisors will continue to provide general financial
advisory services to OSP and Global One. Under the Advisory Agreements, Global
One will (a) pay Mr. Hauser $7,500 per month, (b) grant Mr. Hauser a warrant to
purchase 52,500 shares of Global One Common Stock at an exercise price of $1.50,
per share, and (c) pay certain success fees, if any, to Tamarix, including (i) a
cash fee equal to 2% of the amount of funds raised or committed or obligations
assumed through a financing plus warrants equal to 2% of such amount at the same
price per share and (ii) a cash fee equal to 1% of the consideration paid in an
acquisition.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT OF GLOBAL ONE
(PRO FORMA)
The following table provides information concerning the anticipated
beneficial ownership, as of the Effective Time, of Global One Common Stock by
(i) persons anticipated by Global One to own more than 5% of Global One Common
Stock as of the Effective Time, (ii) each anticipated director and executive
officer of Global One as of the Effective Time and (iii) all such directors and
executive officers as a group.
<TABLE>
<CAPTION>
NUMBER OF SHARES
BENEFICIALLY PERCENT
OWNED (1) OF CLASS
-------------------- ------------
<S> <C> <C>
Joseph C. Angard -- Chairman, Chief Executive Officer
and President 6,448,088(2) 49.6%
Michael A. Malm -- Director and Chief Operating Officer 1,805,465(3) 13.9%
Mark S. Hauser -- Director 379,904(4) 2.8%
Thomas R. King -- Director 8,000(5) *
George J. Vrabeck -- Executive Vice President 100,000(6) *
Christopher B. Lucas -- Vice President of Finance
and Chief Financial Officer 100,000 (7) *
Directors and Executive Officers as a Group (6 individuals) 7,035,992 54.2 %
</TABLE>
- ------------------------
* Less than 1% of the outstanding shares of Common Stock.
(1) Shares not actually outstanding are deemed to be beneficially owned if the
individual has the right to acquire such shares within 60 days. Shares
deemed beneficially owned by virtue of an individual's right to acquire them
are also treated as outstanding when calculating the percent of the class
owned by such individual or any group in which the individual is included
(including Directors and Officers as a group) but not for any other
individual.
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<PAGE>
(2) Includes 1,805,465 shares owned by Michael A. Malm. It is anticipated that
prior to the Effective Time of the KRSI Merger, trusts that will be
established by Mr. Angard and Mr. Malm, respectively, will enter into an
agreement pursuant to which the trustee of Mr. Angard's trust will be given
a proxy entitling Mr. Angard's trust to vote all of the shares owned by Mr.
Malm's trust.
(3) It is anticipated that prior to the Effective Time of the KRSI Merger,
trusts that will be established by Mr. Angard and Mr. Malm, respectively,
will enter into an agreement pursuant to which the trustee of Mr. Angard's
trust will be given a proxy entitling Mr. Angard's trust to vote all of the
shares owned by Mr. Malm's trust.
(4) Includes warrants to purchase 52,500 shares of Global One Common Stock
issued pursuant to the terms of his Financial Advisory Agreement with OSP
and warrants to purchase 322,404 shares issued to Tamarix Capital
Corporation, a Company of which Mr. Hauser is a principal.
(5) Includes options to purchase 15,000 shares of KRSI Common Stock which will
be fully vested and converted into options to purchase 7,500 shares of
Global One Common Stock and the vested portion of options to be granted to
Mr. King pursuant to the formula provisions of the 1996 Stock Option Plan.
(6) Represents options to purchase 200,000 shares of KRSI Common Stock which
will be fully vested and converted into options to purchase 100,000 shares
of Global One Common Stock and options granted to Mr. Vrabeck pursuant to
the terms of his employment agreement under the 1996 Stock Option Plan.
(7) Total represents the vested portion of options to purchase shares of Global
One Common Stock to be granted to Mr. Lucas under the 1996 Stock Option
Plan.
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<PAGE>
KELLY RUSSELL STUDIOS, INC.
SELECTED FINANCIAL DATA
The following selected financial data should be read in conjunction with the
Kelly Russell financial statements and the related notes and with "Kelly Russell
Studios, Inc. Management's Discussion and Analysis of Financial Condition and
Results of Operations" included elsewhere herein. The selected balance sheet
data presented below as of December 31, 1994 and 1995 and the selected statement
of operations data presented below for the years ended December 31, 1993, 1994
and 1995 are derived from the financial statements of Kelly Russell included
elsewhere herein, which financial statements have been audited by McGladrey &
Pullen, LLP, independent auditors. The selected balance sheet data presented
below as of December 31, 1992 and 1993 and the selected statement of operations
data presented below for the year ended December 31, 1992 are derived from
financial statements of Kelly Russell not included herein, which have been
audited by McGladrey & Pullen, LLP, independent auditors. The selected balance
sheet data as of March 31, 1996 and the statement of operations data for the
three months ended March 31, 1995 and 1996 have been derived from Kelly
Russell's unaudited financial statements. Operating results for the three months
ended March 31, 1996 may not be indicative of the results of Kelly Russell that
may be expected for the year ending December 31, 1996 or any future period.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEARS ENDED DECEMBER 31, MARCH 31,
------------------------------------------------- --------------------
1992 (1) 1993 1994 1995 1995 1996
----------- ---------- ----------- ----------- --------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net sales................................. $ 187,766 $2,242,685 $ 2,767,196 $ 2,813,999 $ 512,863 $ 778,614
Cost of sales............................. 117,479 1,231,651 4,217,646 2,553,181 277,404 452,738
----------- ---------- ----------- ----------- --------- ---------
Gross profit (loss)....................... 70,287 1,011,034 (1,450,450) 260,818 235,459 325,876
Operating expenses........................ 221,998 1,196,125 3,734,527 2,133,939 451,950 708,401
----------- ---------- ----------- ----------- --------- ---------
Operating loss............................ (151,711) (185,091) (5,184,977) (1,873,121) (216,491) (382,525)
Other income.............................. -- -- 119,395 40,079 -- --
Interest expense.......................... (1,690) (53,151) (150,448) (7,218) -- (2,024)
----------- ---------- ----------- ----------- --------- ---------
Loss before income taxes and extraordinary
item..................................... (153,401) (238,242) (5,216,030) (1,840,260) (216,491) (384,549)
Extraordinary item........................ -- -- -- 296,994 246,697 --
----------- ---------- ----------- ----------- --------- ---------
Net income (loss)......................... $(153,401) $ (238,242) $(5,216,030) $(1,543,266) $ 30,206 $(384,549)
----------- ---------- ----------- ----------- --------- ---------
----------- ---------- ----------- ----------- --------- ---------
NET LOSS PER COMMON SHARE:
Loss before extraordinary item............ $ (0.04) $ (0.07) $ (1.79) $ (0.52) $ (0.07) $ (0.09)
Extraordinary item........................ -- -- -- 0.08 0.08 --
----------- ---------- ----------- ----------- --------- ---------
Net income (loss) per common share........ $ (0.04) $ (0.07) $ (1.79) $ (0.44) $ 0.01 $ (0.09)
----------- ---------- ----------- ----------- --------- ---------
----------- ---------- ----------- ----------- --------- ---------
Weighted average number of common and
common equivalent shares outstanding..... 2,054,600 2,054,600 2,900,383 3,540,965 3,286,765 4,082,373
</TABLE>
<TABLE>
<CAPTION>
AT DECEMBER 31,
-----------------------------------------------
1992 1993 1994 1995
--------- ---------- ----------- ----------- AT MARCH 31,
1996
------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Current assets..................................... $ 364,809 $1,545,998 $ 1,831,596 $ 1,542,351 $1,119,005
Total assets....................................... 368,911 1,904,096 2,049,312 1,857,285 1,397,329
Current liabilities................................ 431,123 2,192,550 1,703,493 833,840 758,433
Total liabilities.................................. 431,123 2,192,550 1,703,493 833,840 758,433
Accumulated deficit................................ (153,401) (391,643) (5,607,673) (7,150,939) (7,535,488)
Shareholder's equity (deficit)..................... (62,212) (288,454) 345,819 1,023,445 638,896
</TABLE>
- ------------------------------
(1) Kelly Russell was formed in 1992.
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<PAGE>
KELLY RUSSELL STUDIOS, INC. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATION
GENERAL
Kelly Russell commenced operations in January 1992 as a specialty retail art
gallery. Its first products were original paintings and sketches of famous
athletes and memorable sporting events. Those works of art were later used to
produce limited edition lithographic prints. In the fourth quarter of 1992,
Kelly Russell shifted its primary focus to products for mass markets and
introduced the Legends and Superstars framed product line. In the summer of
1993, Kelly Russell began selling an unframed, lower cost and autograph-ready
version of the Legends and Superstars product line. Kelly Russell assembled
finished product from components purchased from third parties, including
original artwork, lithographic prints, frames, mats, glass and other production
materials.
In March 1994, Kelly Russell successfully completed an initial public
offering. Kelly Russell received net proceeds of $5,580,108 from the sale of
1,477,750 shares of Common Stock and from the issuance of 699,986 shares of
Common Stock on the conversion of certain debt and the exercise of certain
warrants.
In 1994, Kelly Russell expended significant resources to expand its product
offerings, to increase its market presence and number of customers and to
develop its assembly operations. However, Kelly Russell's strategy was
unsuccessful and the planned growth in sales volume and profitability failed to
materialize. In November and December 1994, the Board of Directors hired new
management and revised Kelly Russell's business plan and operations to focus
solely on the creation, marketing and sales of limited edition sports art
collectibles through mass merchants, distributors and specialty retail stores.
Beginning in January 1995, Kelly Russell (i) closed its original sports art
gallery and retail store, (ii) discontinued the sales of its software product
and ceramic coffee mug lines developed and introduced in 1994, (iii)
substantially reduced the number of print images in its product lines, (iv)
began outsourcing its assembly, shipping and warehousing activities, (v)
eliminated certain major channels of distribution previously utilized by the
Company, (vi) eliminated most of its employee sales force and increased the
utilization of outside sales representatives; and (vii) eliminated its practice
of offering guaranteed return privileges to certain customers. In December 1994
Kelly Russell recorded a charge to operations totaling $2,458,876 for a
write-down of certain assets and for the reorganization of the business.
In 1995, Kelly Russell expanded its product lines outside the sports art
collectibles in an effort to increase revenues to a level where profitability
could be achieved. The most significant new product items include popular print
images in the entertainment industry, including movie, music and television.
Additionally, Kelly Russell introduced a small group of wild life images. Kelly
Russell also focused its sales and marketing efforts on establishing long-term
customer relationships with national and regional retailers. Kelly Russell was
successful in establishing initial or improved customer relationships with
certain retail chains. However, to date those retail chains have not carried
Kelly Russell's products in all of their stores and there is no assurance that
they will continue to carry Kelly Russell's products or expand distribution to
additional stores.
Although these new strategies resulted in improved operations in 1995,
anticipated sales levels and profitability failed to materialize. Management
believes this failure to increase sales levels was primarily because only the
images of the top few athletes of any given sport resulted in significant sales.
Kelly Russell still lacks a firmly established distribution system and retail
sales were flat in the fourth quarter of 1995. Accordingly, during the fourth
quarter of 1995 Kelly Russell recorded a charge to operations of approximately
$640,000 relating to increased allowances for inventory obsolescence and sales
returns.
In the first quarter of 1996, Kelly Russell's Board of Directors further
revised its business plan and operations to reduce operating costs. In 1996,
Kelly Russell plans to produce and distribute a more limited number of images,
primarily just the top few athletes of any given sport. The product line in
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<PAGE>
1996 will include approximately 100 different images, down from the 300 images
offered during 1995. Additionally, in 1996 Kelly Russell will continue to
increase channels of distribution with existing and new national and regional
retail customers. Kelly Russell also changed contractors for its assembly,
warehousing and shipping function in January 1996. Management believes that
alternate contractors are available in the event Kelly Russell is unable to
obtain services from their current contractor.
In connection with this restructuring, Kelly Russell recorded a charge to
1995 operations of approximately $186,000 for the write-down of inventories,
prepaid licensing rights and original art work, all relating to print images
which will not be aggressively sold during 1996. Kelly Russell also reduced the
number of employees and accepted the resignation of its former Chief Executive
Officer in February 1996. Management believes its new business strategy will
reduce losses and improve cash flow during 1996.
Kelly Russell has explored various alternatives to generate acceptable
revenue growth as a stand-alone company without success. Management of Kelly
Russell believes that combining Kelly Russell's sport licenses and original art
capability with OSP's strong distribution network will provide OSP with another
large market and potential for further expansion. Management of Kelly Russell
believes that the KRSI Merger will therefore give Kelly Russell's shareholders a
significant stake in a company with exciting growth prospects.
However, if the KRSI Merger is not approved by Kelly Russell's shareholders
or not completed for any other reason, management believes it will be necessary
for Kelly Russell to obtain significant debt or equity financing to finance
operations through 1996. If management is unsuccessful in its financing efforts,
Kelly Russell may not be able to continue as a going concern and would be forced
to sell off significant assets, file for protection under federal bankruptcy
laws or liquidate the business.
RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 1996 COMPARED WITH THREE MONTHS ENDED MARCH 31,
1995
Sales for the three months ended March 31, 1996 were $778,614, compared to
$512,863 for the three months ended March 31, 1995, representing an increase of
52%. Management attributes the increase in sales primarily to orders obtained
from national mass merchant accounts.
Cost of goods sold totaled $338,503 for the three months ended March 31,
1996, representing 43% of net sales, compared to $220,884, or 43%, of net sales
for the three months ended March 31, 1995. Kelly Russell's management currently
anticipates that cost of goods sold will be in the range of 43% to 47% of net
sales in 1996, based on currently estimated levels of payments for original
artwork and photographic resources.
License and royalty expenses paid to third parties totaled $114,235, or 15%,
of net sales for the three months ended March 31, 1996, compared to $56,520 or
11% of net sales for the three months ended March 31, 1995. License and royalty
expenses for the three months ended March 31, 1995 were reduced due to credits
received as a result of items returned to Kelly Russell that were recorded as
sold in 1994. Management currently anticipates that license and royalty expenses
will be approximately 15% to 18% of net sales in the future.
Operating expenses increased to $708,401 for the three months ended March
31, 1996, from $451,950 for three months ended March 31, 1995, representing an
increase of $256,451, or 57%. This increase is primarily due to (i) an $118,025
increase in advertising, promotions and services to increase saleability of
Kelly Russell's products, (ii) a $55,283 increase in wages and payroll taxes,
(iii) a $24,935 increase in commissions paid to outside sales representatives as
a result of the increase in sales, (iv) an $11,728 increase in depreciation
relating to purchase of displays in 1995, and (v) a $43,643 increase in
accounting and legal expenses relating to the pending OSP transaction which
expenses are expected to increase during Kelly Russell's second quarter.
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<PAGE>
Kelly Russell has incurred $2,024 of interest expense in the first quarter
of 1996 which relates to finance charges paid to vendors who have extended
payments terms to Kelly Russell. Kelly Russell did not utilize any
interest-bearing debt in the first quarter of 1995.
Kelly Russell incurred a loss of $384,549 for the three months ended March
31, 1996 despite the increase in sales and reduction in cost of goods sold as a
percentage of net sales. While Kelly Russell's sales are anticipated to increase
in 1996 compared to 1995, Kelly Russell does not expect that sales will be
sufficient for Kelly Russell to be profitable in the next three quarters of 1996
or for the year.
YEAR ENDED DECEMBER 31, 1995 COMPARED WITH YEAR ENDED DECEMBER 31, 1994
Net sales for 1995 increased by 1.7% percent to $2,813,999 compared to
$2,767,196 in 1994. During 1995, Kelly Russell discontinued its previous
practice of selling to various grocery and newsstand customers and was
successful in opening distribution channels into large national and regional
retail chains. The top two customers in 1995 accounted for approximately 20% of
net sales, whereas the top two in 1994 accounted for 7% of net sales. Kelly
Russell was also successful in acquiring several entertainment related licenses
and began implementing its movie, music and television product line. Net sales
in 1995 was comprised primarily of sales of Kelly Russell's framed and unframed
products, with approximately 93% bearing sports related images and the remaining
having entertainment related themes. Net sales in 1994 was also comprised
primarily of framed and unframed art, all of which bore sports images. Sales of
discontinued product line items, such as software and ceramic mugs, comprised
approximately 3% of 1994 net sales.
Net sales for 1995 fell below management's expectations. Contributing
factors to the disappointing sales level in 1995 included the fact that only the
images of the top few athletes of any given sport resulted in any significant
sales. This experience has led management to further reduce the number of print
images they will offer in the future. Also adversely affecting 1995 sales was
the lack of a firmly established distribution system and overall soft retail
sales.
Previously, Kelly Russell granted certain of their customers the right to
return all unsold products. This practice was eliminated in early 1995. However,
Kelly Russell has accepted returns of product in circumstances where management
has a particular advantage in doing so. Kelly Russell's net sales include a
provision for future sales returns totaling approximately $110,000 at December
31, 1995 compared to $384,000 at December 31, 1994. A $110,000 allowance for
sales returns was established in the fourth quarter of 1995 to reflect known and
anticipated credits negotiated in the first quarter of 1996 with certain retail
customers that did not experience a desired level of sales of Kelly Russell's
product during the holiday season.
Cost of goods sold totaled $1,961,648 in 1995, representing 69.7% of net
sales for the year, compared to $3,456,857, or 124.9%, of net sales in 1994. The
$1,495,209, or 43.3%, decrease in cost of goods sold for 1995 is primarily
attributable to the 1994 year-end charges to inventory in connection with the
reorganization of Kelly Russell's business plan. Also, during 1995, Kelly
Russell completely outsourced its assembly and warehousing activities which
reduced the costs of manufacturing Kelly Russell's products. In January 1996,
Kelly Russell changed contractors for these services. Management believes that
alternative contractors are available in the event Kelly Russell is unable to
obtain services from their current contractor.
After experiencing lower than expected sales levels in the fourth quarter of
1995, Kelly Russell recorded a charge to operations of approximately $640,000,
of which (i) $520,000 related to write-offs and allowances for inventory which
proved unsalable at any significant levels and, (ii) $110,000 related to the
provision for sales returns discussed above. The inventory obsolescence charges
relate primarily to prints and finished goods inventories produced in
anticipation of the fourth quarter sales that did not materialize. Most of Kelly
Russell's prints of athletes are time sensitive because of the changes in
uniforms and player trades that frequently occur between seasons. As a result,
many of these prints are not salable in any significant quantities in the
following sport season and must be written off if the fourth quarter sales are
below management's expectations and large quantities of carryover inventories
exist. In addition, after further revising its business plan to produce and
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<PAGE>
distribute a more limited number of images, Kelly Russell recorded a charge to
operations of approximately $186,000, of which approximately $80,000 related to
an additional allowance for inventory related to print images which will not be
aggressively sold during 1996.
License and royalty expenses paid to third parties, including payments to
artists for artwork not owned by Kelly Russell, totaled $591,533, or 21%, of net
sales in 1995 compared to $760,784 or 27.5% of net sales in 1994. License and
royalty expenses include amounts paid for guaranteed minimum license fees and
write-down charges of approximately $174,000 and $52,000 in 1995 and 1994,
respectively, to reduce several licenses to net realizable value.
Operating expenses decreased to $2,133,939 in 1995 from $3,734,527 in 1994,
representing a decrease of $1,600,588, or 42.9%. This decrease is primarily due
to a concerted effort to reduce operating costs including reductions as follows:
(i) cutting advertising expenditures by $567,000; (ii) decreasing trade show
expenses by $461,000; (iii) reducing shipping and mailing by $295,000; and (iv)
curtailing travel and entertainment expenditures by $155,000. During the fourth
quarter of 1995, Kelly Russell charged operations for $100,000 relating to
accrued litigation costs representing management's estimate of the cost of
settling certain outstanding claims against Kelly Russell. The litigation
accrual was made as required by SFAS No. 5, CONTINGENCIES, since it was probable
that a loss had been incurred. The accrual was based on management's estimate of
the ultimate loss to be incurred. These litigation claims were settled in May
1996 for $133,000.
Interest expense totaled $7,218 in 1995, compared to $150,448 in 1994. This
decrease is primarily attributable to Kelly Russell recording $120,000 of
noncash financing expense in January 1994 in connection with the issuance of
warrants to the participating promissory noteholders for the purchase of 60,000
shares of Common Stock at $1 per share. Additionally, the decrease in interest
expense is attributable to Kelly Russell's higher financing needs during the
first quarter of 1994 to fund the growth in sales, pending the receipt of the
funds from the initial public offering.
In 1995, Kelly Russell recorded extraordinary income of $296,994 reflecting
reductions in trade payables received in negotiating the settlement of past due
balances owed to certain vendors at December 31, 1994.
YEAR ENDED DECEMBER 31, 1994 COMPARED WITH YEAR ENDED DECEMBER 31, 1993
Net sales for 1994 increased by 23.4% percent to $2,767,196 compared to
$2,242,685 in 1993. The primary reasons for the sales growth include (i)
increased spending for advertising, (ii) increased participation in trade shows
and special events to promote Kelly Russell's products, (iii) the addition of
new customers, (iv) the continued expansion of the Legends and Superstars line
from baseball to other sports, and (v) the introduction of new products,
including ceramic coffee mugs and computer screen savers. However, net sales for
1994 fell significantly short of management expectations. Management believed
Kelly Russell's strategies to distribute product at the retail level through
magazine distributors and grocery stores and the use of guaranteed sales
practices for these customers was unsuccessful. Kelly Russell utilized the
guaranteed sales program in 1993 and 1994 to assist in the introduction of its
products to new customers and in new geographic regions. Kelly Russell recorded
a reserve for estimated returns at the time of shipment and its management made
further adjustments at the end of each quarter to reflect additional facts that
became known through contact with its customers and other sources. However, the
poor fourth quarter 1994 sales and lack of sales at the retail level during the
1994 Holiday Season resulted in a large charge to operations in the fourth
quarter of 1994, primarily because management's estimates of the returns reserve
was insufficient. The new management team hired in December 1994 eliminated the
guaranteed sales program in early 1995. Kelly Russell's net sales reflect a
reduction for sales returns totaling approximately $901,000 in 1994 compared to
approximately $15,000 in 1993. Additionally, Kelly Russell experienced
significant returns of Major League Baseball and National Hockey League product
which management believed adversely affected Kelly Russell's sales in 1994.
Cost of goods sold totaled $3,456,857 in 1994, representing 124.9% of net
sales for the year, compared to $860,863 or 38.4% of net sales in 1993. The
$2,595,994, or 301.6%, increase in cost of
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goods sold for 1994 was primarily attributable to year-end charges totaling
$1,370,000, principally for inventory shrinkage, valuation adjustments and
obsolescence, and charges totaling $1,088,876 in connection with the
reorganization of Kelly Russell's business plan. The fourth quarter charges of
$1,370,000 include (i) a $670,000 charge for inventory obsolescence, (ii) a
$390,000 charge for inventory shrinkage and valuation adjustments, (iii) a
$166,000 charge for bad debts, and (iv) a $144,000 charge for returns on
guaranteed sales. The obsolescence charges related primarily to raw materials
purchased in anticipation of significantly higher sales levels than achieved
during the year and to raw materials purchased in anticipation of new products
that were not developed. The charge for inventory shrinkage and valuation
adjustments relate to book to physical inventory adjustments at December 31,
1994 attributable to quantity and pricing differences that arose throughout 1994
due to problems with the inventory control procedures. These problems were
subsequently resolved in 1995. The charge for bad debts relate to collection
difficulties with certain of its smaller customers. In early 1995, the new
management team significantly improved the credit and collection policies. The
reorganization charges principally included (i) the write-off of prints,
finished products and photographic resources that were not utilized in Kelly
Russell's product line in 1995, (ii) the write-off of capitalized software
development costs and finished goods inventories for Kelly Russell's computer
screen saver and ceramic coffee mug products, (iii) the write-off of the cost of
certain original artwork as a result of Kelly Russell's decision to close its
art gallery and retail store operations, and (iv) the write-off of certain costs
associated with Kelly Russell's assembly operations which were closed in January
1995. The reorganization charge includes a $997,288 charge to cost of sales and
a $91,588 charge to operating expenses. The charge to cost of sales includes (i)
inventory write-offs totaling $320,000, (ii) write-offs of original artwork held
for resale totaling $450,395, (iii) write-off of photographic resources totaling
$101,904, (iv) write-off of capitalized software development costs of $72,740,
and (v) $52,249 for prepaid license fees and other related costs. The charge to
operating expenses includes a $51,588 write-off of equipment and leasehold
improvements and a $40,000 lease termination fee. Kelly Russell did not record
any employee termination benefits or other exit costs as a part of the
reorganization charge, since management believed such costs were immaterial.
Additionally, the increase in cost of goods sold was attributable to Kelly
Russell recording sales returns allowances as a reduction of sales without an
offsetting reduction of cost of goods sold. To a lesser extent, cost of goods
sold increased because of higher production costs attributable to the larger
assembly operation opened in early 1994 and because of the higher sales volume
for the year.
License and royalty expenses paid to third parties, including payments to
artists for artwork not owned by Kelly Russell, totaled $760,789 or 27.5% of net
sales in 1994 compared to $370,788 or 16.5% of net sales in 1993. License and
royalty expenses for 1994 included amounts paid for minimum license fees and for
reorganization charges totaling $52,249 relating to the elimination of certain
products from Kelly Russell's 1995 product line.
Operating expenses increased to $3,734,527 in 1994 from $1,196,125 in 1993,
representing an increase of $2,538,402 or 212%. This increase was primarily due
to the utilization of the net proceeds from the successful initial public
offering in March 1994 to increase the national market awareness of its product
line and to increase the customer base. Marketing expenses, primarily
representing advertising, trade shows and travel and entertainment expenses,
increased to $1,519,659 in 1994 compared to $418,163 in 1993. To a lesser
extent, the 1994 increase in operating expenses was attributable to the addition
of office and production personnel, increased product development costs,
software consulting fees and professional fees relating to operating as a public
company and the year-end reorganization charges.
Interest expense totaled $150,448 in 1994 compared to $53,151 in 1993. This
increase was primarily attributable to Kelly Russell recording $120,000 of
noncash financing expense in January 1994 in connection with the issuance of
warrants to the participating promissory noteholders for the purchase of 60,000
shares of Common Stock at $1 per share. Additionally, the increase in interest
expense is attributable to Kelly Russell's higher financing needs during the
first quarter of 1994 to fund the growth in sales, pending the receipt of the
funds from the initial public offering.
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Other income totaled $119,395 in 1994, representing a gain of $85,978 on the
cancellation of the Common Stock of two former officer/shareholders and interest
earned totaling $33,417 on the unutilized proceeds from the public offering.
SEASONALITY
Kelly Russell generated approximately $1,095,000 (38.9%) and $986,000
(35.6%) of its net sales in the fourth quarter of 1995 and 1994, respectively.
Management believes Kelly Russell will continue to experience a significant
percentage of future sales in the fourth quarter holiday buying season for the
foreseeable future.
LIQUIDITY AND CAPITAL RESOURCES
In February 1996, Kelly Russell restructured its business in an effort to
improve income and cash flows from operations. Kelly Russell is also pursuing
plans to combine its operations with the Company and its subsidiaries in 1996 by
merging with a wholly-owned subsidiary of Global One. However, if the KRSI
Merger is not consummated, management believes it will be necessary for Kelly
Russell to obtain debt or equity financing to finance operations through 1996.
If management is unsuccessful in its financing efforts, Kelly Russell may not be
able to continue as a going concern and would be forced to sell off significant
assets, file for protection under federal bankruptcy laws or liquidate the
business.
In anticipation of future costs the Company may incur as a result of
consummating the transaction contemplated by the Merger Agreement and working
capital needs, the Company entered into a Combined Account Factoring and
Security Agreement on April 8, 1996 (the "Factoring Agreement") with Principal
Resources, LLC, an affiliate of one of the Company's principal shareholders.
Pursuant to this Factoring Agreement, the Company agreed to assign its accounts
receivable for cash. As of May 20, 1996, the Company has assigned $191,000 worth
of accounts receivable for approximately $130,000 and may assign an additional
$470,000 worth of accounts receivable for $330,000. The Company believes that
the Factoring Agreement is on terms no less favorable than could have been
obtained from unaffiliated third parties.
Even if Kelly Russell obtains sufficient financing, its success will
nevertheless be dependent upon the effectiveness of the recent restructuring in
increasing sales and managing costs. The restructuring changes in management,
production, product distribution and operations undertaken in the recent
restructuring have not been in effect sufficiently long to demonstrate their
efficacy in correcting Kelly Russell's financial condition. Kelly Russell can,
therefore, provide no assurance that its new business plan will be effective in
significantly improving Kelly Russell's financial results in 1996 or thereafter.
Kelly Russell had cash of $37,962 and working capital of $360,572 at March
31, 1996, as compared to cash of $257,618 and working capital of $708,511 at
December 31, 1995. Cash flow used in operating activities totaled $119,656 for
the three months ended March 31, 1996, primarily due to the operating loss as
offset partially by the normal first quarter reduction in trade receivables as
customers made payments on their fourth quarter holiday shipments and a
reduction in the amount of inventory purchases. Kelly Russell's first quarter
sales are typically substantially less than its fourth quarter sales.
At December 31, 1995, Kelly Russell had net working capital of approximately
$708,000 compared to $128,000 at December 31, 1994. The principal reason for the
increase in net working capital was the successful completion of private
placements of its Common Stock in 1995 which netted proceeds of $2,217,361.
These proceeds were primarily utilized to finance the net loss from operations
of $1,873,121 and to reduce trade payables. Kelly Russell currently has no bank
debt but has recently entered into arrangements to obtain financing through
factoring of receivables.
SOURCES OF FUNDS
Kelly Russell's primary source of funds in 1995 and 1994 was through the
sale of Common Stock in an initial public offering in March 1994, a private
placement of Common Stock in December 1994 through March 1995, and through the
exercise of warrants during May to September 1995. Prior to
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1994, the principal source of funds was through bank debt and the issuance of
promissory notes. Since inception in 1992, Kelly Russell has relied on the
following sources of funds to finance its operations and growth:
PARTICIPATING PROMISSORY NOTES. Kelly Russell issued $300,000 of
participating promissory notes during the period from October 1992 through
March 1993. The debt proceeds were utilized by Kelly Russell to fund
operations and to obtain the bank financing. These notes were unsecured,
paid interest at 7 percent and were subordinated to all bank debt of Kelly
Russell. The purchasers of the participating promissory notes received
300,000 warrants to purchase Common Stock of Kelly Russell at the price of
$1 per share. In January 1994, the purchasers received an additional 60,000
warrants to purchase Common Stock at $1 per share in return for the waiver
of certain rights upon Kelly Russell's issuance of the convertible
debentures and subsequent repayment of the participating promissory notes,
as discussed below.
BANK AGREEMENTS. Kelly Russell had working capital financing from a
bank in the form of a $1,000,000 revolving line of credit agreement until
March 31, 1994 when amounts under the line of credit were paid in full. The
line of credit was subsequently terminated. Advances under this agreement
were limited based on eligible receivables and committed purchase orders,
were due upon demand, bore interest at 2 percent over the prime rate and
were secured by substantially all of Kelly Russell's assets and the personal
guarantees of certain officers/shareholders.
CONVERTIBLE DEBENTURES. In January 1994, Kelly Russell issued $900,000
of 7% convertible debentures. The proceeds were utilized to repay certain
indebtedness, including $300,000 of participating promissory notes, and to
fund operations. The debentures were unsecured, were subordinated to all
bank debt and were due in February 1995. The debentures were converted to
399,986 shares of Common Stock upon the successful completion of the initial
public offering in March 1994.
INITIAL PUBLIC OFFERING. In March 1994, Kelly Russell received net
proceeds of $4,380,108 upon the issuance of 1,477,750 shares of Common Stock
at $3.50 per share. Kelly Russell received an additional $300,000 upon the
exercise of warrants for the issuance of 300,000 shares of common stock.
Kelly Russell utilized $1,050,000 of the net proceeds to immediately repay
the outstanding bank debt. The remainder of the net proceeds were utilized
during the period from April 1994 to mid-November 1994 to fund Kelly
Russell's business plan and operations. By mid-November 1994, Kelly Russell
was in need of additional financing.
PRIVATE OFFERING. In December 1994, Kelly Russell commenced a private
offering of Units, each Unit consisting of one share of Common Stock and a
warrant to purchase one share of Common Stock, at a price of $1 per Unit, to
fund its current cash shortfall and future operations. In December 1994,
Kelly Russell issued 285,000 Units and received net proceeds of $229,055.
From January 1, 1995 through March 27, 1995, Kelly Russell issued an
additional 641,000 Units for net proceeds of $569,450. From May 1995 through
September 1995, Kelly Russell received additional net proceeds of $1,647,911
from the corresponding exercise of warrants for the purchase of 926,000
shares of Common Stock.
USES OF FUNDS
Kelly Russell's primary use of funds has been to finance operations,
principally for sales and marketing activities, for working capital requirements
resulting from continued net losses and from the growth in net sales, for the
purchase of inventories and for the purchase of original artwork, photographic
resources and equipment. Net cash used in operating activities was $2,206,265 in
1995 and $3,701,426 in 1994, reflecting Kelly Russell's net losses of $1,543,266
in 1995 and $5,216,030 in 1994.
Currently, Kelly Russell's standard credit terms to its customers are net 30
days, except Kelly Russell granted product return rights to certain customers
during 1994 and the latter part of 1993. Although Kelly Russell has discontinued
this practice, Kelly Russell has accepted returns of product in
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circumstances where management has found a particular advantage in doing so.
Kelly Russell has recorded an allowance for sales returns of $110,000 at
December 31, 1995. Management believes its allowances for sales returns to be
adequate at December 31, 1995.
Kelly Russell's original artwork is created by independent artists under
contract to Kelly Russell. The original artwork is utilized for the printed
lithographs in Kelly Russell's product line. Kelly Russell's purchase of
original artwork totaled approximately $264,000 in 1995 and approximately
$329,000 in 1994. Management expects original artwork purchases will total
approximately $150,000 in 1996. In January 1995, Kelly Russell closed its
original sports art gallery and retail store. Beginning in December 1994, Kelly
Russell began including the cost of original artwork in the cost of its print
inventories. Kelly Russell's year-end restructuring charge in 1995 includes the
write-off of original artwork costs totaling approximately $65,000.
Purchases of photographic resources totaled approximately $156,000 in 1995
and approximately $70,000 in 1994. Kelly Russell anticipates that purchases of
photographic resources will be approximately $150,000 in 1996.
Kelly Russell purchased equipment totaling approximately $222,000 in 1995
and $290,000 in 1994. The 1995 purchases principally relate to the purchase of
various display racks and office equipment. In January 1995, Kelly Russell began
outsourcing its assembly, shipping and warehousing operations to a third party,
to which Kelly Russell paid approximately $253,000 in 1995. Additionally, Kelly
Russell executed a new lease agreement for its executive offices during 1995 and
relocated to 2905 Northwest Boulevard, Suite 220, Plymouth, Minnesota, where
Kelly Russell leases approximately 6,200 square feet of office space.
BUSINESS OF KELLY RUSSELL STUDIOS, INC.
Kelly Russell was incorporated under Minnesota law on July 31, 1992, to
acquire the business of a partnership which had been engaged in the creation,
assembly, marketing and distribution of products bearing realistic sports images
since January 1992. After completing the acquisition on November 12, 1992, Kelly
Russell increased net sales from approximately $188,000 for the fiscal year
ended December 31, 1992, to approximately $2,243,000 for the fiscal year ended
December 31, 1993. In March 1994, Kelly Russell completed its initial public
offering of 1,477,750 shares of Common Stock and the related issuance of 699,986
shares of Common Stock on the conversion of certain debt for total net proceeds
of $5,580,108.
During 1994, Kelly Russell expended significant resources to expand its
product offerings, increase its market presence and number of customers and
develop its assembly operations. The product line was expanded in 1994 to
include software and ceramic coffee mugs. However, of more significance, was
Kelly Russell's increase in the number of print images in its product lines.
Kelly Russell's strategy was unsuccessful as the planned growth in sales volume
and profitability failed to materialize. Accordingly, Kelly Russell recorded a
charge to 1994 fourth quarter operations of approximately $1,370,000 relating to
increased allowances for inventory obsolescence, bad debts and sales returns.
In November and December 1994, Kelly Russell's Board of Directors hired new
management and revised Kelly Russell's business plan and operations to focus
solely on the creation, marketing and sales of limited editions of sports art
collectibles through mass merchants, distributors and specialty retail stores.
Beginning in January 1995, Kelly Russell (i) closed its original sports art
gallery and retail store, (ii) discontinued sales of its software product and
ceramic coffee mug lines developed and introduced in 1994, (iii) substantially
reduced the number of print images in its product lines, (iv) began outsourcing
its assembly, shipping and warehousing activities, (v) eliminated certain major
channels of distribution previously utilized by Kelly Russell, (vi) eliminated
most of its employee sales force and increased the utilization of outside sales
representatives, and (vii) eliminated its practice of offering guaranteed return
privileges to certain customers. In December 1994, Kelly Russell also recorded a
charge to operations of approximately $1.1 million in connection with this
reorganization of the business. See "Kelly Russell Studios, Inc. Management's
Discussion and Analysis of Financial Condition and Results of Operations."
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In 1995, Kelly Russell expanded its product lines outside the sports art
collectibles in an effort to increase revenues to a level where profitability
could be achieved. The most significant new product items include popular print
images in the entertainment industry, including movie, music and television.
Additionally, Kelly Russell introduced a small group of wild life images. In
1995, Kelly Russell also focused its sales and marketing efforts on establishing
long-term customer relationships with national and regional retailers. Kelly
Russell was successful in establishing initial or improved customer
relationships with certain retail chains. However, to date those retail chains
have not carried Kelly Russell's products in all of their stores and there is no
assurance that they will continue to carry Kelly Russell's products or expand
distribution to additional stores.
Although these new strategies resulted in improved operations in 1995,
anticipated sales levels and profitability failed to materialize. Kelly Russell
management believes this failure to increase sales levels was primarily because
only the images of the top few athletes of any given sport resulted in
significant sales, Kelly Russell still lacks a firmly established distribution
system and retail sales were flat in the fourth quarter of 1995. During the
fourth quarter of 1995, Kelly Russell recorded a charge to operations of
approximately $640,000 relating to increased allowances for inventory
obsolescence and, to a lesser extent, sales returns.
In February 1996, the Board of Directors further revised its business plan
and operations to reduce operating costs. In 1996, Kelly Russell plans to
produce and distribute a more limited number of images, primarily just the top
few athletes of any given sport. The product line in 1996 will include
approximately 100 different images, down from the 300 images offered during
1995. Additionally, in 1996 Kelly Russell will continue to increase channels of
distribution with existing and new national and regional retail customers.
In connection with this restructuring, Kelly Russell recorded a charge to
1995 operations of approximately $186,000 for the write-down of inventories,
pre-paid licensing rights and original artwork, all relating to print images
which will not be aggressively sold during 1996. Kelly Russell also reduced the
number of employees and accepted the resignation of its former Chief Executive
Officer. Kelly Russell management believes its new business strategy will result
in improved results of operations and cash flow during 1996. Nevertheless, Kelly
Russell anticipates that it will incur significant losses and that it will need
significant debt or equity financing by year end if the Transactions are not
closed.
PRODUCTS
Kelly Russell creates, markets and distributes sports and
entertainment-related art for the collectible market. Kelly Russell's primary
strategy is to use its collection of original art to create innovative,
affordable products with an artistic look, quality and presentation that
differentiates them from other entertainment products, such as posters and
trading cards. Kelly Russell focuses on products with a wide range of appeal
that can be quickly created, produced and sold through mass merchants,
distributors and specialty retail stores. Almost all of Kelly Russell's products
are produced and sold under non-exclusive licenses from major national sports
franchises and their related players' associations. In 1995, Kelly Russell
introduced and expanded its licensing agreements for the movie, music and
television product line.
LEGENDS AND SUPERSTARS-TM-. The Legends and Superstars product is a wall
hanging that measures approximately 11" x 14" and consists of a framed mat with
three openings. The largest opening displays a lithographic print of Kelly
Russell's original art. The two smaller openings contain a photographic picture
and biographical information or a brief description of the pictured item or
personality. Each piece is individually numbered.
The framed Legends and Superstars product was designed for memorabilia
consumers who prefer higher priced, higher quality products than trading cards
and posters. However, at a suggested retail price of $19.99 to $24.99, it is
priced below many other memorabilia items.
In response to the anticipated demand for a lower priced version of its
Legends and Superstars product, Kelly Russell introduced an unframed, "autograph
ready" version of that product line in the
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summer of 1993. The unframed product is substantially the same as the framed
product, except that it is shrink wrapped rather than framed. The plastic shrink
wrap makes it easier for purchasers to remove the product from the packaging and
have it autographed or personalized. If desired, the product can then be framed
at the owner's expense.
The autograph ready Legends and Superstars products sell for a suggested
retail price of $9.99 to $12.99. At that price Kelly Russell believes that this
product is more likely to be purchased in multiple quantities than the framed
product which is believed to be a more traditional gift item.
During 1996, Kelly Russell will offer approximately 100 different images in
both the framed and autograph-ready Legends and Superstars product lines, down
from 300 images offered during 1995. The number of images offered is
periodically adjusted due to seasonality and customer demand. The sales in 1995
were comprised primarily of sales of these products.
LIMITED EDITION LITHOGRAPHS. Kelly Russell historically made full size
lithographic prints from certain pieces of its original art collection. Those
prints were made on high quality stock and were sold in limited editions. Kelly
Russell currently is not emphasizing this aspect of its business.
ORIGINAL ART. Kelly Russell presently owns a collection of over 300
original works of art produced by independent artists. See "-- Product Supply
and Production." At December 31, 1995, Kelly Russell has expensed the cost of
its original artwork except for the cost attributable to lithographic prints in
raw material and finished goods inventories. Most of the pieces are realistic
depictions of famous athletes. Kelly Russell management believes that this
artistic dimension is a key factor that distinguishes Kelly Russell's products
from other entertainment related products.
Although Kelly Russell has made limited efforts to market original paintings
from its existing collection, sales of these paintings have been negligible and
are not expected to add materially to Kelly Russell's revenues in the future.
Kelly Russell will continue to commission and purchase additional pieces of
art for the development of additional products. The emphasis of those purchases
is to update the collection to include recently popular sports personalities or
events. Kelly Russell is required, by the terms of certain of its licenses, to
produce products that contain a minimum number of different athletes during the
terms of the licenses. Kelly Russell is also required to obtain the approval of
the licensors of new images before they are marketed. See "-- License Agreements
and Trademarks."
NEW PRODUCT DEVELOPMENT. Kelly Russell intends to focus its new product
development on expanding and updating the images in its existing product lines.
Kelly Russell believes that its ability to quickly introduce images of recently
popular subject matter, such as the star athletes in the World Series or the
Super Bowl, is important to maintaining the commercial viability of these lines.
When necessary, Kelly Russell has been able to create, obtain approval from
licensors, produce and ship products with new images within six weeks of
identifying the new subject matter. The more typical time frame is approximately
two months from conception to delivery. If new licenses are necessary, Kelly
Russell's ability to introduce new product may be slowed significantly.
Obtaining a new license may require from two months to a year. See "-- License
Agreements and Trademarks."
During 1995, Kelly Russell acquired several entertainment related licenses
and began implementing its movie, music and television product line. Kelly
Russell believes that the addition of these products will expand its current
customer base. Kelly Russell also tested product lines which included various
wildlife images as well as sports team images. In February 1996, Kelly Russell
concluded that the limited appeal and, in the case of wildlife images, different
marketing challenges presented by these products resulted in the failure of both
of these product lines. Therefore, Kelly Russell has selected a limited number
of these images to continue selling and has discontinued production of all
remaining team image and wildlife images.
The expansion of Kelly Russell's product lines may require additional
license rights from persons controlling the subject images. There can be no
assurance that Kelly Russell will be able to create any
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new products that can be successfully marketed and sold or, even if such
products are created, that Kelly Russell will be able to timely obtain the
necessary licenses relating to these products on terms favorable to Kelly
Russell, if at all. See "-- License Agreements and Trademarks."
MARKETING AND DISTRIBUTION
Kelly Russell markets its products through independent sales
representatives, two in-house sales employees, and, as of February 1996, Kelly
Russell hired a national sales organization to manage Kelly Russell's sales
functions. Kelly Russell markets to national and regional retailers (including
mass merchant retailers, department stores, specialty retailers, discount
retailers, and toy stores), distributors of sports memorabilia and a cable
television programming network. Kelly Russell also promotes its products through
various advertising programs which may include retailers. Kelly Russell's
representatives also attend trade shows related to Kelly Russell's business.
Kelly Russell also advertised its products through sports magazines and other
print advertising and anticipates continuing this practice on a limited basis
during 1996.
In 1995, Kelly Russell's framed products were sold to a number of major
retail chains, such as J.C. Penney, although not every store in these chains
carried Kelly Russell's products. During 1995, Kelly Russell concentrated its
efforts on opening distribution channels into retail chains and establishing
initial sales programs with these chains. To date, these chains have not carried
Kelly Russell's products in all of their stores and there can be no assurance
that they will continue sales in those stores currently offering Kelly Russell's
products or that they will expand their distribution of Kelly Russell's products
to other stores. Kelly Russell's strategy in 1996 is to increase its current
channels of distribution to include both new retail chains and additional stores
of mass merchant retailers with whom Kelly Russell has existing relationships.
In 1995, net sales to Musicland represented 12.4% of Kelly Russell's net
sales, whereas in 1994, net sales to J.C. Penney represented 16.5%. No other
customers represented more than 10% of Kelly Russell's net sales in 1995 or
1994. Kelly Russell expects that it will have an even greater concentration of
sales to significant customers in 1996, the loss of any of which could have a
material adverse effect on Kelly Russell.
Commissions paid to Kelly Russell's independent sales representatives
generally range from 5% to 10% of net sales. Kelly Russell's in-house sales
employees are paid a base salary only.
During 1994 and preceding years, Kelly Russell attempted to distribute its
products through channels, such as grocery and drug stores, which required the
right to return all unsold product to Kelly Russell, freight prepaid, for full
credit against the purchase price of such returns. Kelly Russell recorded an
allowance of $384,000 at December 31, 1994 for these potential returns. Kelly
Russell no longer grants its customers the automatic right to return unsold
product, but Kelly Russell has accepted returns of product in certain
circumstances. Accordingly, Kelly Russell has recorded an allowance for sales
returns totaling $110,000 at December 31, 1995, which management believes is
adequate to fairly reflect the financial impact of any potential returns.
LICENSE AGREEMENTS AND TRADEMARKS
Kelly Russell's ability to produce and distribute products depicting any
image owned or controlled by a third party (including all images subject to
copyright, trademark or other protection) is primarily dependent upon Kelly
Russell's ability to obtain rights under license agreements with such third
parties. More particularly, the production or distribution of products depicting
the image of any personality or any team, league, or organization logo or
trademark requires a license from the person, team, league, entertainment
company or organization whose image, logo or trademark is being used. For
example, to commercialize the image of a professional baseball player in his
uniform, Kelly Russell is required to obtain two licenses, one from Major League
Baseball Players Association ("MLBPA") and another from Major League Baseball
Properties ("MLBP").
Kelly Russell presently has non-exclusive license agreements with MLBP,
MLBPA, Major League Baseball Properties Canada Inc., National Football League
Properties, Inc., National Football League Players, Inc., National Hockey League
Enterprises, Inc., National Hockey League Enterprises Canada
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Inc., National Hockey League Players' Association, the National Basketball
Association, several drivers and their sponsors, several individual athletes,
the estates of several deceased athletes, and several entertainment companies or
related organizations. Kelly Russell's business is largely dependent upon its
ability to continue to obtain and maintain these existing licenses and to obtain
additional licenses necessary for the expansion of its activities. Even if new
licenses can be obtained to expand Kelly Russell's activities, the process of
obtaining these licenses may greatly delay Kelly Russell's ability to introduce
new products.
Kelly Russell's agreement with the various players, players' associations or
entertainment companies may enable Kelly Russell to use an individual's name,
picture, facsimile signature, biographical description or entertainment related
title or logo. Pursuant to the terms of these licenses, Kelly Russell is
permitted to produce and sell, in the United States, the original art,
lithographs, framed and unframed Legends and Superstars products and original
art posters. A very limited number of the agreements allow Kelly Russell to sell
the subject products outside the United States. All of these licenses are
non-exclusive and, accordingly, the various licensors are free to grant similar
licenses to other licensees. Each agreement provides for the payment of a
royalty based on a percentage of net sales of licensed products, the majority of
which are subject to a minimum guaranteed royalty. Some of these agreements also
require advance royalty payments. The amount of royalties paid by Kelly Russell
for products sold generally ranges from 9% to 23% of net sales. For the fiscal
years ended December 31, 1994 and 1995, Kelly Russell incurred licensing fees
aggregating approximately $761,000 and $592,000, respectively, for the right to
produce and market products requiring licenses.
The terms of these licenses extend for one to three year periods.
Substantially all of the licenses from the estates of deceased athletes expired
on December 31, 1995 and were renewed in 1996. These agreements are generally
renewable for one year periods, unless notice is given by either party to the
agreements not to renew. The majority of the licenses from the various leagues,
players associations and entertainment companies expire between 1996 and 1998.
Some of the licenses contain renewal provisions which provide for additional one
year extensions as long as Kelly Russell has fulfilled its obligations under the
agreements, upon notice or upon written agreement between the parties. As Kelly
Russell believes that it has fulfilled its obligations under these license
agreements and considers its relationships with the various players'
associations and leagues to be good, Kelly Russell expects these agreements to
be renewed as scheduled. Kelly Russell also believes that it has obtained and is
currently in material compliance with all licenses necessary to produce and
market its existing products and intends to seek additional licenses, as and
when necessary, to permit Kelly Russell to distribute future products. Although
there can be no assurance that, in the future, new licenses will be granted to
Kelly Russell for future products, Kelly Russell has, in the past, been able to
obtain new licenses on terms acceptable to it. The inability of Kelly Russell to
renew existing licenses and/or acquire additional licenses would have a material
adverse effect on Kelly Russell's ability to continue its business operations.
Kelly Russell has registered the trademarks "Kelly Russell Studios,"
"Legends and Superstars" and its "KR" stylized logo with the United States
Patent and Trademark Office. Kelly Russell has also applied to register the
trademark "KRSI" with the United States Patent and Trademark Office.
PRODUCT SUPPLY AND PRODUCTION
Substantially all of Kelly Russell's collection of original art is created
by independent artists. Kelly Russell believes that the quality of its original
art collection is essential to its business and it strives to associate with the
best artists available on a commercially reasonable basis. Typically, Kelly
Russell identifies the subject matter and, from time to time, provides the
artist with reference materials or other information from which the art is
created. If the art is acceptable to Kelly Russell, Kelly Russell may or may not
purchase the art, but will seek an agreement with the artist on terms which
generally provide Kelly Russell with the right to reproduce the original art for
the production of Kelly Russell's products. The terms of the agreements vary
from artist to artist. Kelly Russell made payments to artists aggregating
approximately $372,000 and $264,000 in 1994 and 1995, respectively.
95
<PAGE>
The photographs used in Kelly Russell's Legends and Superstars product lines
and as the basis for original artwork are usually obtained from independent
photographers, photo studios or directly from the major sports franchises. Kelly
Russell purchases the right to use those photographs and, in 1994 and 1995,
respectively, made payments aggregating approximately $70,000 and $156,000 for
photographs and other related costs. The foregoing increase is due to production
of original artwork which uses multiple photographs.
Kelly Russell's staff designs Kelly Russell's products and collects the
statistics and writes the descriptions that are included in the Legends and
Superstars products. The printed lithographs, picture frames, matting, glass and
other production materials are provided to Kelly Russell by independent
contractors and are available from multiple sources. During 1994 and preceding
years, Kelly Russell's employees assembled its products. In 1995, Kelly Russell
utilized an independent contractor to assemble, warehouse and ship its products.
Kelly Russell purchased services of approximately $253,000 from this contractor
during 1995. In January 1996, Kelly Russell changed contractors for these
services. Kelly Russell management believes that alternative contractors are
available in the event Kelly Russell is unable to obtain services from its
current contractor.
COMPETITION
With respect to Kelly Russell's Legends and Superstars products, Kelly
Russell believes that it competes on two different levels. The framed product
competes with other entertainment collectibles and memorabilia, in addition to
lower cost artwork and lithographs in general. The autograph ready product sells
at a lower price point and competes with sports trading cards and less expensive
sports collectibles and memorabilia. Kelly Russell's autograph-ready Legends and
Superstars product is priced higher than most sports trading cards.
Kelly Russell believes that it must compete on the basis of providing high
quality, innovative products that can be profitably sold at affordable prices.
Customer service is also believed to be an important competitive factor in the
sale of product through mass merchandising. Many of Kelly Russell's competitors,
at all levels, are believed to have substantially greater financial and other
resources than Kelly Russell. Direct competitors with similar product lines
include OSP Publishing, Inc. and Dream Team Collectibles, Inc. In the area of
sports trading cards, those competitors include Topps, Inc.; The Upper Deck
Company; Fleer Corp.; and The Scoreboard, Inc. The licenses pursuant to which
Kelly Russell produces its products are non-exclusive and do not assure Kelly
Russell of any competitive advantage.
EMPLOYEES
As of March 22, 1996, Kelly Russell employed 14 full-time persons. No
employees of Kelly Russell are subject to collective bargaining agreements, and
Kelly Russell considers its relations with its employees to be satisfactory.
ENVIRONMENT
Kelly Russell believes that it is in material compliance with existing
federal, state and local regulations relating to the protection of the
environment. Such environmental regulations have not had a material impact on
Kelly Russell's capital expenditures, earnings or competitive position.
SEASONALITY
In the years ended on December 31, 1994 and 1995, Kelly Russell experienced
seasonal fluctuations because a large percentage, 35.6% and 38.9% in 1994 and
1995, respectively, of its net sales were generated in the fourth quarter of the
year during the holiday buying season. Kelly Russell is attempting to reduce the
seasonality of its business with products which management believes will also
sell well during the first three quarters of the fiscal year. Kelly Russell
expects however, that at least some seasonal aspects of its business will
continue in the foreseeable future.
DESCRIPTION OF PROPERTY
Kelly Russell executed a new lease agreement for its executive offices
during 1995 and relocated to 2905 Northwest Boulevard, Suite 220, Plymouth,
Minnesota, where Kelly Russell leases approximately 6,200 square feet of office
space. That lease extends through May 31, 2001 and provides for
96
<PAGE>
monthly rent of approximately $7,000, including certain operating costs. Because
Kelly Russell engages an outside contractor to produce and warehouse its
products, Kelly Russell currently does not require any production or warehouse
space.
LEGAL PROCEEDINGS
Kelly Russell is not currently a party to nor is any of its property subject
to any material legal proceedings.
PRINCIPAL SHAREHOLDERS AND MANAGEMENT OF KELLY RUSSELL
The following table provides information as of March 28, 1996 concerning the
beneficial ownership of Kelly Russell Common Stock by (i) persons known by Kelly
Russell to own more than 5% of Kelly Russell Common Stock, (ii) each director of
Kelly Russell, (iii) the named executive officers in the Summary Compensation
Table, and (iv) all directors and executive officers as a group. Except as
otherwise indicated, the persons named in the table have sole voting and
investment power with respect to all shares of Kelly Russell Common Stock owned
by them.
<TABLE>
<CAPTION>
NUMBER OF SHARES
NAME (AND ADDRESS OF 5% BENEFICIALLY PERCENT
OWNER) OR IDENTITY OF GROUP OWNED (1) OF CLASS (1)
- --------------------------------------------------------- -------------------- -------------
<S> <C> <C>
George J. Vrabeck........................................ 100,000(2) 2.4%
Timothy G. Rath.......................................... 310,000(3) 7.2
John J. Egart............................................ 22,666(4) *
James C. Hawley.......................................... 13,500(4) *
Thomas R. King........................................... 6,000(4) *
Aaron Boxer TTEE......................................... 407,000 10.0
Aaron Boxer Rev. Trust
5500 Wayzata Blvd., #800
Minneapolis, MN 55416
D. B. Johnson............................................ 314,356(5) 7.5
5500 Wayzata Blvd., #800
Minneapolis, MN 55416
All Executive Officers and Directors as a Group (6
Individuals)............................................ 477,166(6) 10.7
</TABLE>
- ------------------------
* Less than 1% of the outstanding shares of Common Stock.
(1) Under the rules of the SEC, shares not actually outstanding are deemed to be
beneficially owned by an individual if such individual has the right to
acquire the shares within 60 days. Pursuant to such SEC Rules, shares deemed
beneficially owned by virtue of an individual's right to acquire them are
also treated as outstanding when calculating the percent of the class owned
by such individual and when determining the percent owned by any group in
which the individual is included.
(2) Includes 100,000 shares which may be purchased by Mr. Vrabeck upon exercise
of a currently exercisable option.
(3) Includes 250,000 shares which may be purchased by Mr. Rath upon exercise of
a currently exercisable option.
(4) Includes 6,000 shares which may be purchased upon exercise of a currently
exercisable option.
(5) Includes 60,000 shares held by family members and 83,356 shares that may be
purchased by Mr. Johnson upon exercise of currently exercisable warrants.
(6) Includes 378,000 shares which may be purchased upon exercise of currently
exercisable options.
97
<PAGE>
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
On December 24, 1994, Kelly Russell entered into an Underwriting Agreement
with Miller, Johnson & Kuehn, Incorporated ("MJK"), of which D. B. Johnson, a
principal shareholder of Kelly Russell, is an affiliate. Pursuant to the
Underwriting Agreement, MJK served as the underwriter of Kelly Russell in
connection with the public offering and sale of 1,477,750 shares of Kelly
Russell Common Stock, which sale was completed on March 31, 1994. MJK received
discounts and commissions in the amount of $517,213 and five-year warrants to
purchase 45,389 shares of Kelly Russell Common Stock at $4.20 per share, as well
as a nonaccountable expense allowance in the amount of $51,721. The warrants to
purchase 45,389 shares of Kelly Russell Common Stock were subsequently
transferred to MJK's affiliates, including Mr. Johnson, who received a warrant
to purchase 14,468 shares of Kelly Russell Common Stock.
On December 29, 1994, Kelly Russell entered into an Agency Agreement with
MJK. Pursuant to the Agency Agreement, MJK served as the exclusive agent of
Kelly Russell in connection with the sale of 926,000 units, each unit consisting
of one share of Common Stock and a warrant to purchase one share of Common
Stock, which sale was completed on March 31, 1995. MJK received commissions in
the amount of $92,600 and five-year warrants to purchase 92,600 shares of Kelly
Russell Common Stock at $2.00 per share, as well as reimbursement of its legal
expenses in the amount of $25,000. The warrants to purchase 92,600 shares of
Kelly Russell Common Stock were subsequently transferred to MJK's affiliates,
including Mr. Johnson, who received a warrant to purchase 34,725 shares of Kelly
Russell Common Stock.
In May 1995, Kelly Russell entered into an agreement with MJK, whereby MJK
served as the exclusive agent of Kelly Russell in connection with the exercise
of warrants issued as part of the units in the private placement described
above. Between the period of May 31, 1995 and September 1, 1995, warrants to
purchase 926,000 shares of Kelly Russell Common Stock were exercised at $2.00
per share. MJK received commissions in the amount of $185,200 and five-year
warrants to purchase an aggregate of 92,600 shares of Kelly Russell Common Stock
at $2.00 per share, of which warrants to purchase 72,100 shares of Kelly Russell
Common Stock were subsequently transferred to MJK's affiliates, including Mr.
Johnson, who received a warrant to purchase 34,725 shares of Kelly Russell
Common Stock.
LEGAL MATTERS
The legality of the shares of Global One Common Stock to be issued to the
Kelly Russell shareholders pursuant to the Transactions will be passed upon for
Global One by Manatt, Phelps & Phillips, LLP, Los Angeles California. The Merger
Agreement provides that as a condition to the KRSI Merger, Global One shall have
received a letter from Kelly Russell's independent auditors or legal counsel
indicating (i) the number of shares of Kelly Russell Common Stock that have been
authorized for issuance by the Board of Directors or Kelly Russell as set forth
in the minutes in the Kelly Russell minute book and (ii) the number of shares of
Kelly Russell Common Stock subject to warrants and options to purchase them that
have been authorized by the Board of Directors.
EXPERTS
The consolidated financial statements of OSP Publishing, Inc. as of December
31, 1995 and for each of the three years in the period ended December 31, 1995
included elsewhere in this Proxy Statement/Prospectus have been audited by
Deloitte & Touche LLP, independent auditors, as stated in their report, and are
included herein in reliance upon the report of such firm given upon their
authority as experts in accounting and auditing.
The financial statements of Kelly Russell as of December 31, 1995 and for
the three-year period ended December 31, 1995 included herein have been audited
by McGladrey & Pullen, LLP, independent auditors, as stated in their report, and
are included herein in reliance upon the report of such firm given upon their
authority as experts in auditing and accounting.
98
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
OSP PUBLISHING, INC.
Independent Auditors' Report.............................................. F-2
Financial Statements
Consolidated Balance Sheets as of March 31, 1996 (unaudited), December
31, 1995 and 1994...................................................... F-3
Consolidated Statements of Operations for the Three Months Ended March
31, 1996 and 1995 (unaudited) and for the Years Ended December 31,
1995, 1994 and 1993.................................................... F-5
Consolidated Statements of Shareholders' Equity for the Three Months
Ended March 31, 1996 (unaudited) and for the Years Ended December 31,
1995, 1994 and 1993.................................................... F-7
Consolidated Statements of Cash Flows for the Three Months Ended March
31, 1996 and 1995 (unaudited) and for the Years Ended December 31,
1995, 1994 and 1993.................................................... F-8
Notes to Consolidated Financial Statements.............................. F-10
</TABLE>
All schedules are omitted because the required information
is not applicable or is included in the Financial
Statements of OSP Publishing, Inc.
and the related notes.
<TABLE>
<S> <C>
KELLY RUSSELL STUDIOS, INC.
Report of Independent Auditors............................................ F-20
Audited Financial Statements
Balance Sheets as of December 31, 1994 and 1995......................... F-21
Statements of Operations for the Years Ended December 31, 1993, 1994 and
1995................................................................... F-22
Statements of Shareholders' Equity for the Years Ended December 31,
1993, 1994 and 1995.................................................... F-23
Statements of Cash Flows for the Years Ended December 31, 1993, 1994 and
1995................................................................... F-24
Notes to Financial Statements........................................... F-25
Unaudited Financial Statements
Balance Sheet as of March 31, 1996...................................... F-34
Statements of Operations for the Three Months Ended March 31, 1995, and
1996................................................................... F-35
Statement of Cash Flows for the Three Months Ended March 31, 1995 and
1995................................................................... F-36
Notes to Financial Statements........................................... F-37
</TABLE>
Financial Statements of Global One are not presented herein
because Global One has no assets and liabilities
and has not conducted any business other
than of an organizational nature.
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Stockholders of
OSP Publishing, Inc.:
We have audited the accompanying consolidated balance sheets of OSP
Publishing, Inc. and subsidiaries (the "Company") as of December 31, 1995 and
1994, and the related consolidated statements of operations, stockholders'
(deficiency) equity, and cash flows for each of the three years in the period
ended December 31, 1995. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in
all material respects, the financial position of OSP Publishing, Inc. and
subsidiaries at December 31, 1995 and 1994, and the results of their operations
and their cash flows for each of the three years in the period ended December
31, 1995 in conformity with generally accepted accounting principles.
As discussed in Note 1 to the consolidated financial statements, the Company
changed its method of accounting for income taxes effective January 1, 1993 to
conform with Statement of Financial Accounting Standards No. 109.
DELOITTE & TOUCHE LLP
Long Beach, California
April 5, 1996 (May 24, 1996 as to Note 14)
F-2
<PAGE>
OSP PUBLISHING, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS (NOTES 7 AND 8)
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------
1995 1994
MARCH 31, 1996 -------------- --------------
--------------
(UNAUDITED)
<S> <C> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents (Note 1)............................. $ 377,778 $ 74,828 $ 288,404
Accounts receivable -- trade, net of allowance for doubtful
accounts and returns of $1,374,361 at March 31, 1996,
$1,644,697 in 1995 and $962,666 in 1994 (Notes 1 and 3)....... 5,958,176 5,248,459 5,309,304
Inventories (Notes 1 and 4).................................... 4,991,559 4,066,012 3,903,027
Prepaid royalty advances (Note 1).............................. 715,948 555,236 794,049
Prepaid expenses and other current assets...................... 366,533 152,147 278,421
Deferred income tax asset (Notes 1 and 11)..................... 38,191 38,191 216,907
Net assets of discontinued operations (Note 13)................ 1,834,084
-------------- -------------- --------------
Total current assets....................................... 12,448,185 10,134,873 12,624,196
PROPERTY AND EQUIPMENT, Net (Notes 1, 5 and 9)................... 1,184,094 1,185,799 847,502
GOODWILL, Net of accumulated amortization of $50,752, $43,390 and
$6,240 at March 31, 1996, December 31, 1995 and 1994,
respectively (Note 1)........................................... 141,131 148,493 185,643
DEPOSITS......................................................... 159,657 229,311 183,189
-------------- -------------- --------------
TOTAL............................................................ $ 13,933,067 $ 11,698,476 $ 13,840,530
-------------- -------------- --------------
-------------- -------------- --------------
</TABLE>
(CONTINUED)
F-3
<PAGE>
OSP PUBLISHING, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (CONTINUED)
LIABILITIES AND STOCKHOLDERS' DEFICIENCY
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------
1995 1994
MARCH 31, 1996 -------------- --------------
--------------
(UNAUDITED)
<S> <C> <C> <C>
CURRENT LIABILITIES:
Accounts payable............................................... $ 4,253,333 $ 3,002,207 $ 3,425,893
Accrued expenses............................................... 1,210,570 1,026,089 1,372,508
Royalties payable (Note 1)..................................... 2,059,097 1,918,129 2,755,400
Due to customers (Note 1)...................................... 204,880 251,903 192,062
Income taxes payable (Note 1).................................. 300,520 240,380 453,025
Revolving line of credit (Note 7).............................. 4,249,069
Current maturities of:
Capitalized lease obligations (Note 9)....................... 84,787 85,003 73,349
Subordinated long-term debt (Note 8)......................... 1,050,000 300,000 300,000
-------------- -------------- --------------
Total current liabilities.................................. 9,163,187 6,823,711 12,821,306
-------------- -------------- --------------
REVOLVING LINE OF CREDIT (Note 7)................................ 4,021,526 2,816,595 --
CAPITALIZED LEASE OBLIGATIONS,
Less current maturities (Note 9)................................ 129,634 149,302 197,784
SUBORDINATED LONG-TERM DEBT,
Less current maturities (Note 8)................................ 1,856,904 2,638,364 1,903,708
MINORITY INTEREST (Note 1)....................................... 614,679 569,277 326,222
COMMITMENTS AND CONTINGENCIES (Notes 7 and 9)
STOCKHOLDERS' DEFICIENCY (Note 1):
Common stock, no par value; authorized, 30,000,000 shares;
issued and outstanding, 1,636, 1,636 and 1,454 shares at March
31, 1996 and in 1995 and 1994, respectively................... 1,262,500 1,262,500 762,500
Additional paid-in capital..................................... 112,500 112,500 112,500
Accumulated deficit............................................ (3,227,863) (2,673,773) (2,283,490)
-------------- -------------- --------------
Total stockholders' deficiency............................. (1,852,863) (1,298,773) (1,408,490)
-------------- -------------- --------------
TOTAL............................................................ $ 13,933,067 $ 11,698,476 $ 13,840,530
-------------- -------------- --------------
-------------- -------------- --------------
</TABLE>
(CONCLUDED)
See accompanying notes to consolidated financial statements.
F-4
<PAGE>
OSP PUBLISHING, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31, YEARS ENDED DECEMBER 31,
-------------------------- -------------------------------------------
1996 1995 1995 1994 1993
------------ ------------ ------------- ------------- -------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
NET SALES (Note 1)............................... $ 8,940,658 $ 7,421,551 $ 38,227,958 $ 42,168,322 $ 38,107,907
------------ ------------ ------------- ------------- -------------
COST OF SALES:
Cost of goods sold............................. 4,347,317 3,180,377 17,016,038 19,368,726 17,444,199
License and royalty expense.................... 922,206 911,891 4,630,843 5,771,188 4,890,729
------------ ------------ ------------- ------------- -------------
Total cost of sales.......................... 5,269,523 4,092,268 21,646,881 25,139,914 22,334,928
------------ ------------ ------------- ------------- -------------
GROSS PROFIT..................................... 3,671,135 3,329,283 16,581,077 17,028,408 15,772,979
------------ ------------ ------------- ------------- -------------
OPERATING EXPENSES (Note 1):
Warehouse and Selling.......................... 2,351,868 2,241,773 10,200,344 10,823,310 8,844,038
General and administrative..................... 1,452,981 1,261,816 4,971,249 5,812,983 4,953,002
------------ ------------ ------------- ------------- -------------
Total operating expenses..................... 3,804,849 3,503,589 15,171,593 16,636,293 13,797,000
------------ ------------ ------------- ------------- -------------
OPERATING INCOME (LOSS).......................... (133,714) (174,306) 1,409,484 392,115 1,975,939
INTEREST EXPENSE (Notes 7, 8 and 9).............. 267,659 172,871 841,173 685,294 604,584
------------ ------------ ------------- ------------- -------------
INCOME (LOSS) BEFORE INCOME TAXES, MINORITY
INTEREST, DISCONTINUED OPERATIONS AND CUMULATIVE
EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE........ (401,373) (347,177) 568,311 (293,179) 1,371,355
INCOME TAX (BENEFIT) PROVISION (Notes 1 and
11)............................................. 67,323 (132,820) (77,336) 115,617 429,109
------------ ------------ ------------- ------------- -------------
INCOME (LOSS) BEFORE MINORITY INTEREST,
DISCONTINUED OPERATIONS AND CUMULATIVE EFFECT OF
CHANGE IN ACCOUNTING PRINCIPLE.................. (468,696) (214,357) 645,647 (408,796) 942,246
MINORITY INTEREST IN (INCOME) LOSS OF
SUBSIDIARIES.................................... (45,420) 37,308 (243,055) 148,048 (378,041)
------------ ------------ ------------- ------------- -------------
INCOME (LOSS) BEFORE DISCONTINUED OPERATIONS AND
CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING
PRINCIPLE....................................... (514,116) (177,049) 402,592 (260,748) 564,205
DISCONTINUED OPERATIONS (Note 13):
Income (loss) from operations of discontinued
operation, less applicable income tax
(benefit) expense of ($6,454) and $4,896 for
the years ended December 31, 1994 and 1993,
respectively.................................. (423,814) 130,650
Loss on disposal of discontinued operation,
less applicable income tax benefit of
$5,268........................................ (345,951)
------------ ------------ ------------- ------------- -------------
Total discontinued operations................ (769,765) 130,650
------------ ------------ ------------- ------------- -------------
</TABLE>
(CONTINUED)
F-5
<PAGE>
OSP PUBLISHING, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS (CONTINUED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31, YEARS ENDED DECEMBER 31,
-------------------------- -------------------------------------------
1996 1995 1995 1994 1993
------------ ------------ ------------- ------------- -------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
INCOME (LOSS) BEFORE CUMULATIVE EFFECT OF CHANGE IN
ACCOUNTING PRINCIPLE................................ $ (514,116) $ (177,049) $ 402,592 $ (1,030,513) $ 694,855
CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE
(Note 1)............................................ 118,084
------------ ------------ ------------- ------------- -------------
NET INCOME (LOSS).................................... $ (514,116) $ (177,049) $ 402,592 $ (1,030,513) $ 812,939
------------ ------------ ------------- ------------- -------------
------------ ------------ ------------- ------------- -------------
PRO FORMA NET INCOME (LOSS) DATA (Note 11):
Income (loss) before income taxes, as reported..... $ (401,373) $ (347,177) $ 568,311 $ (293,179) $ 1,371,355
Pro forma (benefit) provision for income taxes..... (85,114) (70,421) 113,836 (43,273) 344,325
Minority interest in (income) loss of
subsidiaries...................................... (45,420) 37,308 (243,055) 148,048 (378,041)
Discontinued operations, as reported............... (758,043) 135,546
Pro forma tax effect of discontinued operations.... (295,627) 54,218
------------ ------------ ------------- ------------- -------------
Pro forma net income (loss)...................... $ (361,679) $ (239,448) $ 211,420 $ (564,274) $ 730,317
------------ ------------ ------------- ------------- -------------
------------ ------------ ------------- ------------- -------------
PRO FORMA INCOME (LOSS) PER SHARE (Note 14):
Income (loss) from continuing operations........... $ (0.04) $ (0.03) $ 0.06
Minority interest in (income) loss of
subsidiaries...................................... (0.01) (0.03)
------------ ------------ -------------
Pro forma net income (loss)...................... $ (0.05) $ (0.03) $ 0.03
------------ ------------ -------------
------------ ------------ -------------
Weighted average shares outstanding................ 8,036,602 8,036,207 8,036,602
------------ ------------ -------------
------------ ------------ -------------
</TABLE>
(CONCLUDED)
See accompanying notes to consolidated financial statements.
F-6
<PAGE>
OSP PUBLISHING, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' (DEFICIENCY) EQUITY
<TABLE>
<CAPTION>
RETAINED NOTE
COMMON STOCK ADDITIONAL EARNINGS RECEIVABLE
--------------------- PAID-IN (ACCUMULATED --
SHARES AMOUNT CAPITAL DEFICIT) STOCKHOLDER TOTAL
--------- ---------- ----------- ------------ ------------ -----------
<S> <C> <C> <C> <C> <C> <C>
BALANCE, JANUARY 1, 1993................ 1,250 $ 62,500 $ 112,500 $ 170,622 $ (125,000) $ 220,622
Issuance of common stock................ 204 700,000 700,000
Dividends............................... (1,096,464) (1,096,464)
Net Income.............................. 812,939 812,939
--------- ---------- ----------- ------------ ------------ -----------
BALANCE, DECEMBER 31, 1993.............. 1,454 762,500 112,500 (112,903) (125,000) 637,097
Issuance of common stock................
Dividends............................... (1,140,074) (1,140,074)
Repayment of note receivable (Note 6)... 125,000 125,000
Net loss................................ (1,030,513) (1,030,513)
--------- ---------- ----------- ------------ ------------ -----------
BALANCE, DECEMBER 31, 1994.............. 1,454 762,500 112,500 (2,283,490) (1,408,490)
Issuance of common stock................ 182 500,000 500,000
Dividends............................... (792,875) (792,875)
Net Income.............................. 402,592 402,592
--------- ---------- ----------- ------------ ------------ -----------
BALANCE, DECEMBER 31, 1995.............. 1,636 1,262,500 112,500 (2,673,773) (1,298,773)
Dividends (unaudited)................... (39,974) (39,974)
Net loss (unaudited).................... (514,116) (514,116)
--------- ---------- ----------- ------------ ------------ -----------
BALANCE, MARCH 31, 1996................. 1,636 $1,262,500 $ 112,500 $(3,227,863) $(1,852,863)
--------- ---------- ----------- ------------ ------------ -----------
--------- ---------- ----------- ------------ ------------ -----------
</TABLE>
See accompanying notes to consolidated financial statements.
F-7
<PAGE>
OSP PUBLISHING, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31, YEARS ENDED DECEMBER 31,
------------------------- ----------------------------------------
1996 1995 1995 1994 1993
------------ ----------- ------------ ------------ ------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)............................... $ (514,116) $ (177,049) $ 402,592 $ (1,030,513) $ 812,939
Adjustments to reconcile net income (loss) to
net cash provided by (used in) operating
activities:
Depreciation and amortization................. 89,393 104,261 429,665 400,775 318,356
Loss (gain) on sale of property and
equipment.................................... 1,894 298 (596)
Minority interest in (income) loss of
subsidiaries................................. 45,402 (37,308) 243,055 (148,048) 378,041
Deferred income taxes......................... 178,716 (81,970) (16,853)
Loss on disposal of discontinued operations... 345,951
Cumulative effect of accounting change........ (118,084)
Changes in operating assets and liabilities:
Accounts receivable -- trade.................. (665,578) 885,424 1,127,398 179,180 (3,401,383)
Inventories................................... (920,516) 664,058 885,297 (492,874) (2,825,677)
Prepaid royalty advances...................... (160,712) (131,473) 238,813 (416,345) (43,758)
Prepaid expenses and other current assets..... (214,386) (354,274) 131,704 (122,047) 18,921
Due from affiliates........................... 326,907 29,992
Accounts payable.............................. 1,236,382 148,948 (798,639) 1,106,388 1,087,186
Accrued expenses.............................. 147,904 (54,112) (383,989) (276,834) 1,085,165
Royalties payable............................. 140,968 (538,260) (837,271) 395,602 1,448,304
Due to customers.............................. (47,023) 6,201 59,841 (29,953) (174,668)
Income taxes payable.......................... 60,140 (132,820) (212,645) (154,909) 563,220
------------ ----------- ------------ ------------ ------------
Net cash (used in) provided by operating
activities................................. (802,142) 383,596 1,466,431 1,308 (838,895)
------------ ----------- ------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment.............. (78,175) (49,350) (621,901) (370,551) (295,941)
Proceeds from sale of property and equipment.... 20,973 2,283 1,525
Goodwill........................................ 6,434 (141,883)
Deposits........................................ 69,654 43,429 (8,054) (81,343) (56,757)
------------ ----------- ------------ ------------ ------------
Net cash used in investing activities....... (8,521) (5,921) (608,982) (443,177) (493,056)
------------ ----------- ------------ ------------ ------------
</TABLE>
(CONTINUED)
F-8
<PAGE>
OSP PUBLISHING, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31, YEARS ENDED DECEMBER 31,
------------------------- ----------------------------------------
1996 1995 1995 1994 1993
------------ ----------- ------------ ------------ ------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments on capital lease obligations.......... $ (19,884) $ (19,527) $ (80,332) $ (119,336) $ (86,311)
Borrowings from revolving line of credit....... 1,204,931 4,332,454 4,315,866
Payments on revolving line of credit........... (400,000) (1,432,474) (2,516,596) (2,152,655)
Borrowings on subordinated long-term debt...... 750,000
Payments on subordinated long-term debt........ (31,460) (3,138) (15,344) (223,983) (353,544)
Dividends paid................................. (39,974) (91,957) (792,875) (1,140,074) (1,096,464)
Issuance of common stock....................... 500,000 700,000
Repayment of note receivable from
stockholder................................... 125,000
Minority interest in subsidiary................ 96,230
------------ ----------- ------------ ------------ ------------
Net cash provided by (used in) financing
activities................................ 1,113,613 (514,622) (1,071,025) 457,465 1,423,122
------------ ----------- ------------ ------------ ------------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS..................................... 302,950 (136,947) (213,576) 15,596 91,171
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD... 74,828 288,404 288,404 272,808 181,637
------------ ----------- ------------ ------------ ------------
CASH AND CASH EQUIVALENTS, END OF PERIOD......... $ 377,778 $ 151,457 $ 74,828 $ 288,404 $ 272,808
------------ ----------- ------------ ------------ ------------
------------ ----------- ------------ ------------ ------------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid (received) during the period for:
Interest..................................... $ 158,955 $ 210,897 $ 752,172 $ 646,227 $ 349,852
Income taxes................................. $ 7,000 $ (43,407) $ 67,500 $ 39,000
</TABLE>
SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND FINANCING TRANSACTIONS --
Capital lease obligations of $43,504 and $117,400 were incurred when the Company
entered into agreements for the purchase of new equipment in 1995 and 1994,
respectively.
(CONCLUDED)
See accompanying notes to consolidated financial statements.
F-9
<PAGE>
OSP PUBLISHING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION WITH RESPECT TO THE THREE MONTHS ENDED
MARCH 31, 1996 AND 1995 IS UNAUDITED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION -- OSP Publishing, Inc. ("OSP") and subsidiaries (the
"Company") design and produce licensed trend merchandise which they market for
sale in gift and stationary stores, video stores, music stores, toy stores, book
stores and mass retailers. The Company's products consist of posters, T-shirts,
framed wall decor, buttons, key chains, stickers, and collectible movie scripts.
These products incorporate primarily licensed images and characters from motion
pictures, television, comic books, music, sports and popular culture.
PRINCIPLES OF CONSOLIDATION -- The consolidated financial statements include
the accounts of OSP, its division, Top Banana (which was discontinued in 1994 --
see Note 13), its 79%-owned subsidiary, Button Exchange, Ltd., and its 51%-owned
subsidiary, Stanley DeSantis, Inc., which was acquired during 1993. All material
intercompany transactions have been eliminated in consolidation. A minority
interest is held by one officer of each subsidiary (see Note 12).
INTERIM PERIOD PRESENTATION -- The unaudited consolidated financial
statements as of and for the three months ended March 31, 1996 and 1995 have
been prepared on the same basis as the audited financial statements included
herein. In the opinion of management, such unaudited financial statements
include all adjustments (consisting of only normal recurring accruals) necessary
for a fair presentation. The results of operations for the three months ended
March 31, 1996 are not necessarily indicative of results that may be expected
for the year ending December 31, 1996 or in any future period.
USE OF ESTIMATES -- The preparation of financial statements in conformity
with generally accepted accounting principles requires the Company's management
to make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
FAIR VALUE OF FINANCIAL INSTRUMENTS -- The Company's financial instruments
consist primarily of accounts receivable and payable, and debt instruments. The
carrying values of all financial instruments, other than debt instruments, are
representative of their fair values due to their short maturities. The carrying
values of the Company's bank debt instruments are considered to approximate
their fair values because the interest rates of these instruments are based on
variable reference rates. Management believes that the fair value of
subordinated debt would not differ significantly from the carrying amount at
March 31, 1996 and at December 31, 1995 and 1994.
CASH AND CASH EQUIVALENTS -- The Company considers all investment
instruments purchased with a maturity of three months or less to be cash
equivalents.
CONCENTRATION OF CREDIT RISK -- Financial instruments that subject the
Company to credit risk consist primarily of accounts receivable. Concentration
of credit risk with respect to accounts receivable is generally diversified due
to the large number of entities composing the Company's customer base and their
geographic dispersion. The Company performs ongoing credit evaluations of its
customers and maintains an allowance for potential credit losses.
SIGNIFICANT LICENSORS AND CUSTOMERS -- OSP's largest licensor, Disney
Enterprises, Inc., represented approximately 22%, 31% and 22% of net sales of
products in 1995, 1994 and 1993, respectively, and represented less than 10% and
approximately 23% of net sales for the three months ended March 31, 1996 and
1995, respectively. Another licensor represented approximately 23% of net sales
for the three months ended March 31, 1996. Sales to two customers each accounted
for approximately
F-10
<PAGE>
OSP PUBLISHING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION WITH RESPECT TO THE THREE MONTHS ENDED
MARCH 31, 1996 AND 1995 IS UNAUDITED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
10% of net sales during 1995, sales to two customers accounted for approximately
15% and 11% of net sales for the three months ended March 31, 1996, and sales to
one customer accounted for approximately 11% of net sales for the three months
ended March 31, 1995.
INVENTORIES -- Inventories, consisting primarily of posters, buttons,
T-shirts and trend gift items, are valued at the lower of cost or market, with
cost determined on the first-in, first-out method.
ROYALTIES -- The Company has entered into license agreements with various
companies requiring payment of royalties. At the inception of the license term,
minimum royalty payments are accounted for as prepaid royalties. These prepaid
royalties are charged to operations based on the related product sales or
license term.
PROPERTY AND EQUIPMENT -- Property and equipment are stated at cost.
Depreciation is provided for by the straight-line method over the estimated
useful lives of the related assets, which range from two to ten years. Leasehold
improvements are amortized on a straight-line basis over the term of the lease
or estimated useful life, whichever is shorter.
GOODWILL -- Goodwill from the acquisition of the Company's two subsidiaries
represents the excess cost over the fair value of net assets acquired and is
being amortized over useful lives ranging from five to ten years using the
straight-line method. The Company periodically reviews the value of its goodwill
to determine if an impairment has occurred. The Company bases its determination
on the performance, on an undiscounted basis, of the underlying businesses.
Based on its review, the Company does not believe that an impairment of its
goodwill has occurred.
In March 1995, the Financial Accounting Standards Board issued Statement No.
121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of." The adoption of this statement in the three months
ended March 31, 1996 did not have an effect on the Company's consolidated
financial statements.
NET SALES -- Revenue is recognized when goods are originally shipped. The
Company allows customers to return purchased goods only in exchange for other
goods. Customer credits for goods returned but not yet exchanged for other goods
are included in the accompanying balance sheet as "Due to customers." The
Company provides for estimated returns when the products are shipped to its
customers.
INCOME TAXES -- OSP has elected to be treated as an S Corporation for
federal and California state income tax purposes. Pursuant to these elections,
the income of OSP is included in the income tax returns of its stockholders.
Consequently, no provision for federal income taxes is recorded in the
accompanying financial statements for OSP. However, under California state law,
an income tax equal to 1.5% of income before tax is imposed upon an S
corporation and is provided for in the accompanying financial statements.
The Company's subsidiaries, Stanley DeSantis, Inc. and Button Exchange,
Ltd., are C Corporations, under which provisions for federal and state income
taxes are recorded.
Effective January 1, 1993, the Company adopted Statement of Financial
Accounting Standards ("SFAS") No. 109, "Accounting for Income Taxes," which
requires an asset and liability approach to financial accounting and reporting
for income taxes. Deferred income tax assets and liabilities are computed
annually for differences between the financial statement and income tax bases of
assets and liabilities that will result in taxable or deductible amounts in the
future. Such deferred income tax asset and liability computations are based on
enacted tax laws and rates applicable to periods in which
F-11
<PAGE>
OSP PUBLISHING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION WITH RESPECT TO THE THREE MONTHS ENDED
MARCH 31, 1996 AND 1995 IS UNAUDITED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
the differences are expected to affect taxable income. A valuation allowance is
established, when necessary, to reduce deferred income tax assets to the amount
expected to be realized. Income tax expense is the tax payable or refundable for
the period plus or minus the change during the period in deferred income tax
assets and liabilities.
The cumulative effect as of January 1, 1993 as a result of adopting SFAS No.
109 was $118,084 and is included in net income for the year ended December 31,
1993.
RECLASSIFICATIONS -- Certain reclassifications have been made to 1994 and
1993 amounts to conform to the 1995 presentation.
2. ACQUISITION AGREEMENT AND FORMATION OF HOLDING COMPANY
On March 27, 1996 the Company entered into an agreement to acquire Kelly
Russell Studios, Inc. ("Kelly Russell"), a publicly-traded entity. The Company's
stockholders have formed Global One Distribution and Merchandising Inc. ("Global
One") to serve as a holding company for OSP and its subsidiaries and to acquire
Kelly Russell. Each two outstanding shares of Kelly Russell common stock will be
exchanged for one share of Global One stock. Global One also plans to complete a
private placement of common stock for approximately $6.7 million and intends to
register the Global One common stock issued in exchange for the Kelly Russell
common stock with the Securities and Exchange Commission.
3. ACCOUNTS RECEIVABLE
The Company's subsidiary, Stanley DeSantis, Inc., sells substantially all of
its accounts receivable to a factor under a continuing contract, cancelable upon
written notice. In most cases, the factor approves the credit and the account is
sold without recourse. In cases in which the factor does not approve the credit,
Stanley DeSantis, Inc. bears the risk. At March 31, 1996, December 31, 1995 and
1994, the receivables that were at the Company's risk were approximately
$207,000, $251,000 and $117,000, respectively. At March 31, 1996, December 31,
1995 and 1994, amounts due from factor included in accounts receivable -- trade
were $2,095,463, $821,730 and $363,316, respectively. The factor, to the extent
of any financing provided, holds a security interest in all accounts receivable
and property of Stanley DeSantis, Inc.
4. INVENTORIES
Inventories consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------
1995 1994
MARCH 31, ------------- -------------
1996
-------------
(UNAUDITED)
<S> <C> <C> <C>
Products in process.............................. $ 1,267,376 $ 659,657 $ 1,113,291
Finished products................................ 3,569,824 3,159,953 2,714,313
Packaging materials.............................. 154,359 246,402 75,423
------------- ------------- -------------
$ 4,991,559 $ 4,066,012 $ 3,903,027
------------- ------------- -------------
------------- ------------- -------------
</TABLE>
F-12
<PAGE>
OSP PUBLISHING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION WITH RESPECT TO THE THREE MONTHS ENDED
MARCH 31, 1996 AND 1995 IS UNAUDITED)
5. PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------
1995 1994
MARCH 31, ------------- -------------
1996
-------------
(UNAUDITED)
<S> <C> <C> <C>
Computer equipment............................... $ 656,938 $ 600,138 $ 498,782
Machinery and equipment.......................... 495,887 495,887 449,721
Furniture and fixtures........................... 377,034 359,808 345,936
Leasehold improvements........................... 468,597 462,597 55,609
Vehicles......................................... 81,165 81,165 88,665
------------- ------------- -------------
2,079,621 1,999,595 1,438,713
Less accumulated depreciation and amortization... 895,527 813,796 591,211
------------- ------------- -------------
Property and equipment, net...................... $ 1,184,094 $ 1,185,799 $ 847,502
------------- ------------- -------------
------------- ------------- -------------
</TABLE>
Included in the above is equipment under capitalized leases in the amounts
of approximately $384,731, $422,263 and $379,000 with accumulated depreciation
of approximately $170,409, $186,245 and $102,000 at March 31, 1996, December 31,
1995 and 1994, respectively.
6. NOTE RECEIVABLE -- STOCKHOLDER
In 1992, the Company sold 1,002,444 shares of common stock to an officer of
the Company in exchange for a $125,000 note receivable, which bore interest at
the rate of 6.62% per annum, payable in annual principal installments of $31,250
commencing January 3, 1994 through 1997. On January 1, 1994, this note was
repaid with proceeds received from a dividend declared by the Company.
7. REVOLVING LINE OF CREDIT
In February 1996, the Company refinanced its outstanding line of credit with
a bank with another financial institution. The refinanced line of credit expires
in February 1999 and provides for maximum borrowings of $7,500,000, subject to a
borrowing base of approximately 75% of eligible accounts receivable and 45% of
eligible finished goods inventory, as defined. The outstanding balance under the
refinanced line of credit bears interest at a bank's prime rate (8.5% at
December 31, 1995) plus 1.75% and is payable monthly. The agreement also
provides for $200,000 for standby letters of credit which may be drawn upon and
reduce the available borrowings under the line of credit. The borrowings under
the refinanced line of credit are collateralized by substantially all of the
assets of the Company and a certificate of deposit held by a third party, in an
amount of at least $500,000, to be held at a bank designated by the financial
institution. The refinanced line of credit line is personally guaranteed by the
principal stockholders and contains various restrictive covenants including a
current ratio requirement, minimum level of tangible net worth, and limits the
incurrence of additional indebtedness, capital expenditures and payments of
distributions.
8. SUBORDINATED LONG-TERM DEBT
Subordinated long-term debt is payable to the former owner of the Company
and is collateralized by all of the Company's assets. Interest is calculated at
prime plus 2% per annum, unless prime plus 2% shall equal or exceed 10% per
annum, in which case interest shall accrue at the higher of (1) the prime
interest rate, or (2) 10% per annum. The Company is required to pay monthly
principal payments of $25,000 plus accrued interest until July 15, 1997, at
which time the remaining principal
F-13
<PAGE>
OSP PUBLISHING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION WITH RESPECT TO THE THREE MONTHS ENDED
MARCH 31, 1996 AND 1995 IS UNAUDITED)
8. SUBORDINATED LONG-TERM DEBT (CONTINUED)
balance is due. The note is due on demand if there is a sale of more than 50% of
the Company's outstanding stock. The note is subordinated to all business debt
now or hereinafter incurred by the Company.
In addition, the Company obtained in October and November 1995 subordinated
debt financing from a vendor totaling $750,000, which bears interest at 10% per
annum. Interest is payable monthly, and the principal is due January 1997. The
borrowings are collateralized by a security interest in all of the assets of the
Company.
The Company also entered into a minimum purchase agreement with the vendor,
whereby it agreed to purchase or procure a minimum of 75% of its total printing
from the vendor, and the minimum amount payable to the vendor for printing shall
not be less than $2,500,000 per year.
Future minimum payments of subordinated long-term debt are summarized as
follows:
<TABLE>
<CAPTION>
YEAR ENDING
DECEMBER 31,
- -------------------------------------------------------------------------------
<S> <C>
1996......................................................................... $ 1,050,000
1997......................................................................... 1,856,904
-------------
Total...................................................................... $ 2,906,904
-------------
-------------
</TABLE>
9. CAPITALIZED LEASE OBLIGATIONS
The Company has various capitalized lease obligations payable in monthly
installments of $9,438, including interest at rates ranging from 7.5% to 17.3%
per annum. The capitalized lease obligations are due at various dates through
September 1999 and are collateralized by property and equipment. Future minimum
lease payments are as follows:
<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31,
- ---------------------------------------------------------------------------------
<S> <C>
1996........................................................................... $ 110,884
1997........................................................................... 109,410
1998........................................................................... 57,200
1999........................................................................... 3,939
-----------
281,433
Less amount representing interest................................................ 47,128
-----------
Net minimum lease payments....................................................... 234,305
Less amount due in one year...................................................... 85,003
-----------
Long-term obligations under capital leases....................................... $ 149,302
-----------
-----------
</TABLE>
10. COMMITMENTS AND CONTINGENCIES
LEASES -- The Company leases facilities and equipment from nonaffiliated and
affiliated parties under noncancelable operating leases expiring through June
2005. Amounts paid to affiliated parties during 1995, 1994 and 1993 were
approximately $66,000, $194,000 and $153,000, respectively. For the three months
ended March 31, 1995 the amount paid was $38,000.
F-14
<PAGE>
OSP PUBLISHING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION WITH RESPECT TO THE THREE MONTHS ENDED
MARCH 31, 1996 AND 1995 IS UNAUDITED)
10. COMMITMENTS AND CONTINGENCIES (CONTINUED)
Future minimum rental commitments (excluding taxes, insurance and other
occupancy expenses) under noncancelable leases are as follows:
<TABLE>
<CAPTION>
YEAR ENDING
DECEMBER 31,
- -------------------------------------------------------------------------------
<S> <C>
1996......................................................................... $ 559,720
1997......................................................................... 499,049
1998......................................................................... 465,198
1999......................................................................... 445,620
2000......................................................................... 465,855
Thereafter................................................................... 2,261,721
-------------
Total...................................................................... $ 4,697,163
-------------
-------------
</TABLE>
Rent expense was approximately $525,000, $367,000 and $392,000 for the years
ended December 31, 1995, 1994 and 1993, respectively, and $131,000 and $100,000
for the three months ended March 31, 1996 and 1995, respectively.
STOCK PURCHASE WARRANTS -- The Company issued stock warrants on August 28,
1989 to a nonaffiliated party to purchase 50 shares of stock for $50 per share.
The warrants may be exercised at any time and expire August 27, 1996. No
warrants have been exercised through March 31, 1996.
OTHER -- The Company is involved in litigation arising in the normal course
of business. It is the opinion of management that the disposition of such
actions will not materially affect the financial position or results of
operations of the Company.
11. INCOME TAXES AND PRO FORMA INCOME TAXES
The components of income tax expense are as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31, YEARS ENDED DECEMBER 31,
----------------------- --------------------------------------
1996 1995 1995 1994 1993
--------- ------------ ------------ ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Current:
Federal....................................... $ 46,657 $ (92,049) $ (250,359) $ 125,174 $ 542,483
State......................................... 20,666 (40,771) (5,693) 72,413 164,081
--------- ------------ ------------ ----------- -----------
67,323 (132,820) (256,052) 197,587 706,564
--------- ------------ ------------ ----------- -----------
Deferred:
Federal....................................... 151,314 (69,904) (11,072)
State......................................... 27,402 (12,066) (5,781)
--------- ------------ ------------ ----------- -----------
178,716 (81,970) (16,853)
Less income taxes netted against capital
contributions to the Company's subsidiaries.... 260,602
--------- ------------ ------------ ----------- -----------
Total....................................... $ 67,323 $ (132,820) $ (77,336) $ 115,617 $ 429,109
--------- ------------ ------------ ----------- -----------
--------- ------------ ------------ ----------- -----------
</TABLE>
Deferred income tax assets of approximately $187,000 consist primarily of
state net operating loss carryforwards and allowances for doubtful accounts,
sales returns and inventory. Such amount is included in the accompanying balance
sheet net of approximately $49,000 of deferred income tax
F-15
<PAGE>
OSP PUBLISHING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION WITH RESPECT TO THE THREE MONTHS ENDED
MARCH 31, 1996 AND 1995 IS UNAUDITED)
11. INCOME TAXES AND PRO FORMA INCOME TAXES (CONTINUED)
liabilities resulting primarily from state income taxes and income tax
deductions for prepaid assets that have not been expensed for book purposes.
Additionally, a valuation allowance for deferred tax assets of approximately
$100,000 has been recorded for the Button Exchange subsidiary as a result of its
continuing operating losses.
The Company's effective income tax rate differs from the federal statutory
income tax rate due primarily to OSP's being taxed as an S corporation as
discussed in Note 1 and the valuation allowance on certain deferred tax assets.
In 1993, the Company and a minority stockholder of the Company's subsidiary,
Button Exchange, Ltd., contributed capital to that subsidiary through the
forgiveness of certain indebtedness in a taxable transaction.
The following information reflects the pro forma effect on income taxes as
if OSP's earnings from continuing operations had been subject to federal and
state income taxes as a C Corporation for all periods presented:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31, YEARS ENDED DECEMBER 31,
------------------------ --------------------------------------
1996 1995 1995 1994 1993
---------- ------------ ------------ ---------- ------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Current:
Federal...................................... $ 6,366 $ (83,412) $ 264,417 $ 13,511 $ 579,328
State........................................ 2,820 (36,946) 117,117 32,705 147,539
---------- ------------ ------------ ---------- ------------
9,186 (120,358) 381,534 46,216 726,867
Deferred:
Federal...................................... (74,046) 40,202 (196,484) (69,263) (93,074)
State........................................ (20,254) 9,735 (71,214) (20,226) (28,866)
---------- ------------ ------------ ---------- ------------
(94,300) 49,937 (267,698) (89,489) (121,940)
Less income taxes netted against capital
contributions to the Company's subsidiaries... 260,602
---------- ------------ ------------ ---------- ------------
Total...................................... $ (85,114) $ (70,421) $ 113,836 $ (43,273) $ 344,325
---------- ------------ ------------ ---------- ------------
---------- ------------ ------------ ---------- ------------
</TABLE>
F-16
<PAGE>
OSP PUBLISHING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION WITH RESPECT TO THE THREE MONTHS ENDED
MARCH 31, 1996 AND 1995 IS UNAUDITED)
11. INCOME TAXES AND PRO FORMA INCOME TAXES (CONTINUED)
The pro forma income tax provision on earnings from continuing operations
subject to income taxes differs from the statutory federal income tax rate due
to the following:
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH
31, YEARS ENDED DECEMBER 31,
-------------------------- --------------------------------------
1996 1995 1995 1994 1993
------------ ------------ ------------ ---------- ------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Federal income taxes at the statutory rate... $ (136,467) $ (118,040) $ 193,226 $ (99,681) $ 466,261
State income taxes, net of federal benefit... (12,691) 8,422 25,265 11,119 50,163
Permanent differences........................ 7,603 17,264 36,254 45,289 (172,099)
Losses for which no benefit was recognized... 56,441
Prior year overaccrual (underaccrual)........ 21,934 (140,909)
------------ ------------ ------------ ---------- ------------
$ (85,114) $ (70,421) $ 113,836 $ (43,273) $ 344,325
------------ ------------ ------------ ---------- ------------
------------ ------------ ------------ ---------- ------------
</TABLE>
Pro forma income taxes related to discontinued operations differs from the
statutory rate primarily due to the state income taxes, net of federal benefit.
The Company will terminate the S Corporation election at the closing of the
acquisition of Kelly Russell and the private placement offering, and will
recognize a deferred tax asset representing the cumulative temporary differences
as of the termination date. Had the termination of the S Corporation election
occurred on March 31, 1996, December 31, 1995 and 1994, the Company would have
recorded a net deferred tax asset as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------
1995 1994
MARCH 31, ----------- -----------
1996
-----------
(UNAUDITED)
<S> <C> <C> <C>
Deferred tax assets:
Allowance for sales returns.............................................. $ 338,639 $ 464,328 $ 129,931
Allowance for doubtful accounts.......................................... 197,477 170,797 101,166
Inventory reserve........................................................ 228,215 228,215 154,390
Inventory capitalization................................................. 116,910 112,201 104,834
Other.................................................................... 10,796 10,796 14,725
----------- ----------- -----------
892,037 986,337 505,046
----------- ----------- -----------
Deferred tax liabilities -- State deferrals................................ 59,271 59,271 29,005
----------- ----------- -----------
Net deferred tax asset..................................................... $ 832,766 $ 927,066 $ 476,041
----------- ----------- -----------
----------- ----------- -----------
</TABLE>
12. RELATED PARTY TRANSACTIONS
During January 1994, in exchange for the release from certain guarantees,
the Company received 2,900 additional shares of Button Exchange, Ltd. common
stock from a minority stockholder, increasing its ownership to 79%.
The Company's principal stockholder has a 26% equity interest in Press One,
a printing company majority owned by the former owner of the Company. The
Company purchased approximately $997,000, $1,355,000 and $917,000 of printing
services from Press One in 1995, 1994 and 1993,
F-17
<PAGE>
OSP PUBLISHING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION WITH RESPECT TO THE THREE MONTHS ENDED
MARCH 31, 1996 AND 1995 IS UNAUDITED)
12. RELATED PARTY TRANSACTIONS (CONTINUED)
respectively. For the three months ended March 31, 1996 and 1995, the amounts
paid were $131,000 and $280,000, respectively. As of March 31, 1996, December
31, 1995 and 1994, the Company owed approximately $152,000, $278,000 and
$423,000, respectively, to Press One.
The Company's principal stockholder is also a shareholder in Pyramid
Licensing which represents licensors of properties, some of whom may license
such properties to OSP. OSP has guaranteed Pyramid Licensing's performance under
a lease agreement for which the annual commitment is $46,000. For the three
months ended March 31, 1996, OSP has also paid certain expenses, mainly
salaries, totaling approximately $16,000.
The former owner of the Company owned the main facilities from which the
Company conducted its operations. These facilities were under operating leases
that expired December 31, 1994. The Company moved its main facilities in April
1995 to their present location whose lease is with an unaffiliated entity.
The Company pays commissions to an outside agency of sales representatives.
The outside agency pays to the OSP Shareholders a consulting fee on the basis of
commissions received from the Company. The Company paid $639,384, $751,315 and
$491,585 of commissions to the outside agency in 1995, 1994 and 1993,
respectively. For the three months ended March 31, 1996 and 1995, the amounts
paid were $45,523 and $75,828, respectively.
In addition, the Company has advanced funds to its majority stockholders,
who in turn advanced the funds to certain affiliated companies. During 1994, the
balance of these advances, $324,998, was repaid with proceeds received in the
form of a dividend from the Company.
13. DISCONTINUED OPERATIONS
During fiscal 1994, the Company committed to a formal plan to phase out and
dispose of its division, Top Banana, a distributor of licensed battery operated
electronic products. The phase-out and ultimate sale of the remaining assets
have been substantially completed as of February 1996.
The loss on disposition of the division has been accounted for as
discontinued operations. Revenues of the division for 1995, 1994 and 1993 were
$1,174,000, $3,532,000 and $2,586,000, respectively, and $521,000 for the three
months ended March 31, 1995.
14. PRO FORMA NET INCOME PER SHARE
In connection with the organization of Global One as the parent company of
OSP, the shareholders of OSP are expected to receive 6,448,088 shares of common
stock of Global One in exchange for the common stock outstanding at March 31,
1996. The pro forma weighted average shares outstanding assumes that this
exchange had occurred throughout the periods presented, includes the dilutive
common equivalent shares from stock warrants (using the treasury stock method)
and also gives effect to 1,393,550 shares deemed to be outstanding. These shares
represent the approximate number of shares deemed to be sold by the Company (at
the net offering proceeds of $1.26 per share) to fund the S corporation
distribution of $1,750,000 that is expected to be declared prior to the closing
of the Kelly Russell acquisition and private placement offering and will be paid
from the proceeds of the offering. Common and common equivalent shares issued
during the 12-month period prior to the proposed offering have been included in
the calculation using the treasury stock method as if they were outstanding for
all periods presented.
F-18
<PAGE>
OSP PUBLISHING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION WITH RESPECT TO THE THREE MONTHS ENDED
MARCH 31, 1996 AND 1995 IS UNAUDITED)
15. SUBSEQUENT EVENTS
The Company anticipates that it will enter into an arrangement with the
minority shareholder and President of its 51% owned subsidiary, Stanley
DeSantis, Inc. The arrangement will provide that the President has an option,
subject to terms and conditions, to purchase the 51% of the Common Stock owned
by the Company at a price, determined based on the previous four years of
operating income of Stanley DeSantis, Inc. The arrangement will also contain
bonus provisions for the President.
On May 23, 1996, the Company entered into an agreement with the former owner
of the Company and holder of the subordinated long-term debt to allow the
Company to prepay by August 31, 1996 the outstanding balance of the subordinated
debt at a discount of 30%. The agreement also allows for prepayments subsequent
to August 31, 1996 with the discount rate declining by 1% per month until the
payment is received.
F-19
<PAGE>
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors and Shareholders
Kelly Russell Studios, Inc.
Plymouth, Minnesota
We have audited the accompanying balance sheets of Kelly Russell Studios,
Inc. (Kelly Russell) as of December 31, 1994 and 1995, and the related
statements of operations, shareholders' equity, and cash flows for each of the
three years in the period ended December 31, 1995. These financial statements
are the responsibility of Kelly Russell's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Kelly Russell as of December
31, 1994 and 1995, and the results of its operations and its cash flows for each
of the three years in the period ended December 31, 1995, in conformity with
generally accepted accounting principles.
The accompanying financial statements have been prepared assuming that Kelly
Russell will continue as a going concern. As discussed in Note 10, Kelly Russell
has suffered significant losses to date and has an accumulated deficit of
$7,150,939, which raises substantial doubt about Kelly Russell's ability to
continue as a going concern. Management's plans in regard to these matters,
including the restructuring of Kelly Russell, are described in Notes 9 and 10.
The financial statements do not include any adjustments relating to the
recoverability and classification of reported asset amounts or the amounts and
classification of liabilities that might result from the outcome of this
uncertainty.
McGLADREY & PULLEN, LLP
Minneapolis, Minnesota
March 11, 1996
F-20
<PAGE>
KELLY RUSSELL STUDIOS, INC.
BALANCE SHEETS
DECEMBER 31, 1994 AND 1995
ASSETS (NOTE 9)
<TABLE>
<CAPTION>
1994 1995
-------------- --------------
<S> <C> <C>
Current Assets
Cash and cash equivalents....................................................... $ 403,840 $ 257,618
Trade receivables, less allowances 1994 $560,000; 1995 $161,000 (Note 7)........ 704,723 709,988
Inventories (Note 2)............................................................ 666,321 372,370
Prepaid expenses:
Licensing rights.............................................................. 37,826 175,945
Other......................................................................... 18,886 26,430
-------------- --------------
Total current assets...................................................... 1,831,596 1,542,351
Equipment, net of accumulated depreciation 1994 $44,583; 1995 $114,060............ 217,716 314,934
-------------- --------------
$ 2,049,312 $ 1,857,285
-------------- --------------
-------------- --------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Accounts payable (Note 11)...................................................... $ 1,415,605 $ 597,649
Accrued expenses:
Accrued litigation costs (Notes 8 and 12)..................................... -- 100,000
Other......................................................................... 82,632 79,130
License fees payable............................................................ 205,256 57,061
-------------- --------------
Total current liabilities................................................. 1,703,493 833,840
-------------- --------------
Commitments and Contingencies (Notes 8 and 12)
Shareholders' Equity (Notes 3, 5, 6, and 9)
Common stock, $0.01 par value; 10,000,000 shares authorized; issued and
outstanding 2,514,736 shares in 1994 and 4,082,373 shares in 1995.............. 25,147 40,824
Additional paid-in capital...................................................... 5,933,227 8,133,560
Deferred compensation expense................................................... (4,882) --
Accumulated deficit............................................................. (5,607,673) (7,150,939)
-------------- --------------
345,819 1,023,445
-------------- --------------
$ 2,049,312 $ 1,857,285
-------------- --------------
-------------- --------------
</TABLE>
See Notes to Financial Statements.
F-21
<PAGE>
KELLY RUSSELL STUDIOS, INC.
STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995
<TABLE>
<CAPTION>
1993 1994 1995
------------- -------------- --------------
<S> <C> <C> <C>
Net sales (Note 7)................................................. $ 2,242,685 $ 2,767,196 $ 2,813,999
------------- -------------- --------------
Cost of sales (Note 9):
Cost of goods sold............................................... 860,863 3,456,857 1,961,648
License and royalty expenses..................................... 370,788 760,789 591,533
------------- -------------- --------------
Total cost of sales............................................ 1,231,651 4,217,646 2,553,181
------------- -------------- --------------
Gross profit (loss)............................................ 1,011,034 (1,450,450) 260,818
Operating expenses (Note 9)........................................ 1,196,125 3,734,527 2,133,939
------------- -------------- --------------
Operating loss................................................. (185,091) (5,184,977) (1,873,121)
Other income....................................................... -- 119,395 40,079
Interest expense................................................... (53,151) (150,448) (7,218)
------------- -------------- --------------
Loss before income taxes and extraordinary item................ (238,242) (5,216,030) (1,840,260)
Federal and state income taxes (Note 4) -- -- --
------------- -------------- --------------
Loss before extraordinary item................................. (238,242) (5,216,030) (1,840,260)
Extraordinary item (Note 11)....................................... -- -- 296,994
------------- -------------- --------------
Net loss....................................................... $ (238,242) $ (5,216,030) $ (1,543,266)
------------- -------------- --------------
------------- -------------- --------------
Net loss per common share:
Loss before extraordinary item................................... $ (0.07) $ (1.79) $ (0.52)
Extraordinary item............................................... -- -- 0.08
------------- -------------- --------------
Net loss per common share...................................... $ (0.07) $ (1.79) $ (0.44)
------------- -------------- --------------
------------- -------------- --------------
Weighted average number of common and common equivalent shares
outstanding....................................................... 2,054,600 2,900,383 3,540,965
</TABLE>
See Notes to Financial Statements.
F-22
<PAGE>
KELLY RUSSELL STUDIOS, INC.
STATEMENTS OF SHAREHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL DEFERRED
-------------------- PAID-IN COMPENSATION ACCUMULATED
SHARES AMOUNT CAPITAL EXPENSE DEFICIT
--------- --------- ---------- ------------- ------------
<S> <C> <C> <C> <C> <C>
Balance, December 31, 1992................................... 700,000 $ 7,000 $ 84,189 $ -- $ (153,401)
Issuance of common stock at $1.00 per share on April 1,
1993, in exchange for services............................ 12,000 120 11,880 -- --
Net loss................................................... -- -- -- -- (238,242)
--------- --------- ---------- ------------- ------------
Balance, December 31, 1993................................... 712,000 7,120 96,069 -- (391,643)
Issuance of 25,000 employee options to purchase common
stock at $2.25 per share on January 20, 1994 (Note 5)..... -- -- 18,750 (18,750) --
Issuance of 400,000 incentive options to purchase common
stock at $2.48 per share on January 20, 1994 (Note 5)..... -- -- 207,950 (207,950) --
Issuance of warrants for the purchase of 60,000 shares of
common stock for $1.00 per share in January 1994 (Note
3)........................................................ -- -- 120,000 -- --
Issuance of 240,000 shares of restricted common stock on
February 25, 1994 (Note 5)................................ 240,000 2,400 717,600 (720,000) --
Issuance of common stock for $1.00 per share upon exercise
of warrants on March 31, 1994 (Note 3).................... 300,000 3,000 297,000 -- --
Issuance of common stock at $3.50 per share on March
31,1994, net of offering expenses of $792,017............. 1,477,750 14,777 4,365,331 -- --
Conversion of $900,000 of convertible debentures into
common stock on March 31, 1994 (Note 3)................... 399,986 4,000 896,000 -- --
Issuance of common stock at $1.00 per share on December 30,
1994, net of offering expenses of $55,945 (Note 9)........ 285,000 2,850 226,205 -- --
Forfeiture of 9,000 employee options (Note 5).............. -- -- (6,750) 6,750 --
Forfeiture of 400,000 options to purchase common stock
(Notes 5 and 9)........................................... -- -- (207,950) 207,950 --
Forfeiture of 240,000 shares of restricted common stock
(Note 9).................................................. (240,000) (2,400) (717,600) 720,000 --
Forfeiture of 660,000 shares of common stock (Note 9)...... (660,000) (6,600) (79,378) -- --
Noncash compensation expense............................... -- -- -- 7,118 --
Net loss................................................... -- -- -- -- (5,216,030)
--------- --------- ---------- ------------- ------------
Balance, December 31, 1994................................... 2,514,736 25,147 5,933,227 (4,882) (5,607,673)
Issuance of common stock at $1.00 per share in February and
March 1995, net of offering expenses of $71,550........... 641,000 6,410 563,040 -- --
Issuance of common stock upon exercise of warrants, at
$2.00 per share in May to September 1995, net of offering
expenses of $204,089...................................... 926,000 9,260 1,638,651 -- --
Issuance of common stock upon exercise of stock options.... 637 7 443 -- --
Forfeiture of employee options and noncash compensation
expense................................................... -- -- (1,801) 4,882 --
Net loss................................................... -- -- -- -- (1,543,266)
--------- --------- ---------- ------------- ------------
Balance, December 31, 1995................................... 4,082,373 $ 40,824 $8,133,560 $ -- $(7,150,939)
--------- --------- ---------- ------------- ------------
--------- --------- ---------- ------------- ------------
<CAPTION>
TOTAL
-----------
<S> <C>
Balance, December 31, 1992................................... $ (62,212)
Issuance of common stock at $1.00 per share on April 1,
1993, in exchange for services............................ 12,000
Net loss................................................... (238,242)
-----------
Balance, December 31, 1993................................... (288,454)
Issuance of 25,000 employee options to purchase common
stock at $2.25 per share on January 20, 1994 (Note 5)..... --
Issuance of 400,000 incentive options to purchase common
stock at $2.48 per share on January 20, 1994 (Note 5)..... --
Issuance of warrants for the purchase of 60,000 shares of
common stock for $1.00 per share in January 1994 (Note
3)........................................................ 120,000
Issuance of 240,000 shares of restricted common stock on
February 25, 1994 (Note 5)................................ --
Issuance of common stock for $1.00 per share upon exercise
of warrants on March 31, 1994 (Note 3).................... 300,000
Issuance of common stock at $3.50 per share on March
31,1994, net of offering expenses of $792,017............. 4,380,108
Conversion of $900,000 of convertible debentures into
common stock on March 31, 1994 (Note 3)................... 900,000
Issuance of common stock at $1.00 per share on December 30,
1994, net of offering expenses of $55,945 (Note 9)........ 229,055
Forfeiture of 9,000 employee options (Note 5).............. --
Forfeiture of 400,000 options to purchase common stock
(Notes 5 and 9)........................................... --
Forfeiture of 240,000 shares of restricted common stock
(Note 9).................................................. --
Forfeiture of 660,000 shares of common stock (Note 9)...... (85,978)
Noncash compensation expense............................... 7,118
Net loss................................................... (5,216,030)
-----------
Balance, December 31, 1994................................... 345,819
Issuance of common stock at $1.00 per share in February and
March 1995, net of offering expenses of $71,550........... 569,450
Issuance of common stock upon exercise of warrants, at
$2.00 per share in May to September 1995, net of offering
expenses of $204,089...................................... 1,647,911
Issuance of common stock upon exercise of stock options.... 450
Forfeiture of employee options and noncash compensation
expense................................................... 3,081
Net loss................................................... (1,543,266)
-----------
Balance, December 31, 1995................................... $ 1,023,445
-----------
-----------
</TABLE>
See Notes to Financial Statements.
F-23
<PAGE>
KELLY RUSSELL STUDIOS, INC.
STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995
<TABLE>
<CAPTION>
1993 1994
-------------- --------------
<S> <C> <C>
Cash Flows From Operating Activities
Net loss........................................................................... $ (238,242) $ (5,216,030)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation..................................................................... 6,106 58,006
Amortization..................................................................... 9,372 44,956
Loss on sale of equipment........................................................ -- --
Provision for trade receivable allowances........................................ 15,000 540,000
Provision for obsolete inventories............................................... -- 670,000
Restructuring charges (Note 9)................................................... -- 1,088,876
Gain on cancellation of common stock (Note 9).................................... -- (85,978)
Noncash expense.................................................................. -- 127,118
Gain on settlement of accounts payable........................................... -- --
Changes in assets and liabilities:
Trade receivables.............................................................. (556,683) (645,977)
Inventories.................................................................... (974,459) (1,065,173)
Prepaid expenses............................................................... (45,047) (29,550)
Accounts payable and accrued expenses.......................................... 497,181 825,112
License fees payable........................................................... 182,863 (12,786)
-------------- --------------
Net cash used in operating activities........................................ (1,103,909) (3,701,426)
-------------- --------------
Cash Flows From Investing Activities
Purchase of equipment.............................................................. (43,187) (290,229)
Proceeds from sale of equipment.................................................... -- --
Software development costs......................................................... -- (81,832)
-------------- --------------
Net cash used in investing activities........................................ (43,187) (372,061)
-------------- --------------
Cash Flows From Financing Activities
Proceeds on sale of common stock and warrants...................................... -- 4,909,163
Excess of outstanding checks over bank balance..................................... 36,383 (36,383)
Net borrowings (repayments) on bank financing agreements........................... 957,000 (957,000)
Borrowings (repayment) of participating promissory notes........................... 100,000 (300,000)
Proceeds from subordinated debentures.............................................. -- 900,000
Repayment of officer/shareholder advances.......................................... -- (48,000)
-------------- --------------
Net cash provided by financing activities.................................... 1,093,383 4,467,780
-------------- --------------
Net increase (decrease) in cash and cash equivalents......................... (53,713) 394,293
Cash and Cash Equivalents
Beginning.......................................................................... 63,260 9,547
-------------- --------------
Ending............................................................................. $ 9,547 $ 403,840
-------------- --------------
-------------- --------------
Supplemental Disclosures of Cash Flow Information
Cash payments for interest......................................................... $ 30,802 $ 47,493
Supplemental Schedule of Noncash Investing and Financing Activities
Conversion of subordinated debentures to 399,986 shares of common stock............ $ -- $ 900,000
Issuance of 12,000 shares of common stock in settlement of accounts payable........ 12,000 --
Accounts payable incurred for purchase of equipment................................ -- --
<CAPTION>
1995
--------------
<S> <C>
Cash Flows From Operating Activities
Net loss........................................................................... $ (1,543,266)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation..................................................................... 90,427
Amortization..................................................................... 164
Loss on sale of equipment........................................................ 17,867
Provision for trade receivable allowances........................................ 152,276
Provision for obsolete inventories............................................... 853,153
Restructuring charges (Note 9)................................................... 186,543
Gain on cancellation of common stock (Note 9).................................... --
Noncash expense.................................................................. 4,882
Gain on settlement of accounts payable........................................... (296,994)
Changes in assets and liabilities:
Trade receivables.............................................................. (157,541)
Inventories.................................................................... (638,224)
Prepaid expenses............................................................... (253,348)
Accounts payable and accrued expenses.......................................... (474,009)
License fees payable........................................................... (148,195)
--------------
Net cash used in operating activities........................................ (2,206,265)
--------------
Cash Flows From Investing Activities
Purchase of equipment.............................................................. (172,367)
Proceeds from sale of equipment.................................................... 16,400
Software development costs......................................................... --
--------------
Net cash used in investing activities........................................ (155,967)
--------------
Cash Flows From Financing Activities
Proceeds on sale of common stock and warrants...................................... 2,216,010
Excess of outstanding checks over bank balance..................................... --
Net borrowings (repayments) on bank financing agreements........................... --
Borrowings (repayment) of participating promissory notes........................... --
Proceeds from subordinated debentures.............................................. --
Repayment of officer/shareholder advances.......................................... --
--------------
Net cash provided by financing activities.................................... 2,216,010
--------------
Net increase (decrease) in cash and cash equivalents......................... (146,222)
Cash and Cash Equivalents
Beginning.......................................................................... 403,840
--------------
Ending............................................................................. $ 257,618
--------------
--------------
Supplemental Disclosures of Cash Flow Information
Cash payments for interest......................................................... $ 7,218
Supplemental Schedule of Noncash Investing and Financing Activities
Conversion of subordinated debentures to 399,986 shares of common stock............ $ --
Issuance of 12,000 shares of common stock in settlement of accounts payable........ --
Accounts payable incurred for purchase of equipment................................ 49,545
</TABLE>
See Notes to Financial Statements.
F-24
<PAGE>
KELLY RUSSELL STUDIOS, INC.
NOTES TO FINANCIAL STATEMENTS
1. NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
NATURE OF BUSINESS -- Kelly Russell Studios, Inc. (Kelly Russell) creates,
assembles, markets, and distributes products bearing realistic sports,
entertainment, and wildlife images. Kelly Russell has a collection of original
art and uses those proprietary images to create innovative and affordable
products. Substantially all of Kelly Russell's products are produced and sold
under nonexclusive licenses from the players' associations that represent
professional athletes and from the organizations that represent the respective
leagues and their member teams, entertainment companies, and others. Sales are
made to customers, primarily retailers and specialty stores, located throughout
the United States. Kelly Russell grants credit to its customers on terms
established on an individual basis. Kelly Russell's sales have been seasonal in
nature as approximately 40, 36, and 39 percent of net sales have occurred in the
fourth quarter of 1993, 1994, and 1995, respectively.
A summary of the Kelly Russell's significant accounting policies follows:
BASIS OF FINANCIAL STATEMENT PRESENTATION AND ACCOUNTING ESTIMATES -- The
financial statements have been prepared in conformity with generally accepted
accounting principles. In preparing the financial statements, management is
required to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities as of
the date of the balance sheet and revenues and expenses for the period. Actual
results could differ from those estimates. See the accounting policies for
revenue recognition, inventory, and licensing and royalty expenses for the
estimation process relating to sales returns and allowances, inventory
obsolescence, and prepaid licenses.
REVENUE RECOGNITION -- Kelly Russell recognizes sales at the time products
are shipped to customers. Kelly Russell records an allowance for returns at the
shipment date and makes further revisions in such allowances, if necessary,
based on subsequent facts. During 1993 and 1994, Kelly Russell granted certain
customers the right to return unsold products. This policy was eliminated in
1995. Also, trade receivables include an allowance for doubtful accounts which
management has estimated based on an evaluation of the uncollectibility of
existing trade receivables and prior collection experience. At December 31, 1994
and 1995, Kelly Russell has recorded an allowance for returns of $384,000 and
$110,000, respectively, and an allowance for doubtful accounts of $176,000 and
$51,000, respectively.
CASH AND CASH EQUIVALENTS -- Cash in excess of daily requirements is
invested in money market funds with maturities of less than three months. Such
investments are deemed to be cash equivalents for purposes of the statements of
cash flows.
Kelly Russell maintains cash in bank deposit accounts which, at times, may
exceed federally insured limits. Kelly Russell has not experienced any losses in
such accounts.
INVENTORIES -- Inventories are stated at the lower of standard cost (which
approximates average cost) or market. Inventories consist of finished goods and
component parts manufactured by third parties, including prints, mats, glass,
and frames. Kelly Russell has recorded a reserve for potential obsolete
inventory based primarily on management's estimate of future sales levels of
products in inventory.
LICENSING AND ROYALTY EXPENSES -- Prepaid licensing rights represent the
prepayment of license and royalty fees to third parties, including various
players' associations that represent professional athletes, organizations that
represent the respective leagues and their member teams, entertainment
companies, and the estates of other athletes. Licensing agreements provide Kelly
Russell the ability to produce and distribute products depicting specified
images owned or approved by these third parties. These agreements generally are
for periods of one to three years and contain minimum license provisions. The
prepaid licensing rights are generally amortized based on the per unit license
or
F-25
<PAGE>
KELLY RUSSELL STUDIOS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
1. NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
royalty cost provided in the individual contract. Additionally, Kelly Russell
increases the amortization of prepaid licenses for those agreements where the
estimated future unit sales is expected to be less than minimum levels required
under the related licenses. License fees payable represents amounts payable
under these agreements.
DEPRECIATION -- Equipment is stated at cost and is depreciated using the
straight-line method over estimated useful lives of three to five years.
INCOME TAXES -- Deferred taxes are provided on a liability method whereby
deferred tax assets are recognized for deductible temporary differences and
operating loss and tax credit carryforwards and deferred tax liabilities are
recognized for taxable temporary differences. Temporary differences are the
differences between the reported amounts of assets and liabilities and their tax
bases. Deferred tax assets are reduced by a valuation allowance when, in the
opinion of management, it is more likely than not that some portion or all of
the deferred tax assets will not be realized. Deferred tax assets and
liabilities are adjusted for the effects of changes in tax laws and rates on the
date of enactment.
NET LOSS PER COMMON SHARE -- Net loss per common share is computed based
upon the weighted average number of common shares and dilutive common equivalent
shares outstanding. Pursuant to Securities and Exchange Commission Staff
Accounting Bulletin No. 83, common stock issued and to be issued for
consideration below the initial public offering price during the 12-month period
preceding the date of the initial filing of the registration statement has been
included in the calculation of common equivalent shares, as if it was
outstanding for all periods presented up through March 31, 1994, the date of the
initial public offering.
FAIR VALUE OF FINANCIAL INSTRUMENTS -- At December 31, 1995, Kelly Russell
adopted Financial Accounting Standards Board (FASB) Statement No. 107,
DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS, which requires disclosure
of fair value information about financial instruments, whether or not recognized
in the balance sheet, for which it is practicable to estimate that value.
Statement No. 107 excludes certain financial instruments and all nonfinancial
instruments from its disclosure requirements. The aggregate fair values of the
financial instruments would not represent the underlying value of Kelly Russell.
The financial statements include the following financial instruments: cash,
trade accounts receivable, accounts payable, and license fees payable. At
December 31, 1995, no separate comparison of fair values versus carrying values
is presented for the aforementioned financial instruments since their fair
values are not significantly different than their balance sheet carrying
amounts.
RECENTLY ISSUED ACCOUNTING STANDARDS -- The FASB has issued Statement No.
121 (SFAS 121), ACCOUNTING FOR THE IMPAIRMENT OF LONG-LIVED ASSETS AND FOR
LONG-LIVED ASSETS TO BE DISPOSED OF. This statement is effective for Kelly
Russell's year ending December 31, 1996. SFAS 121 requires recognition of
impairment of long-lived assets in the event the net book value of such assets
exceeds the future undiscounted cash flows attributable to such assets.
The FASB has issued Statement No. 123 (SFAS 123), ACCOUNTING FOR STOCK-BASED
COMPENSATION. This statement is effective for Kelly Russell's year ending
December 31, 1996. SFAS 123 establishes a fair value-based method of accounting
for stock-based compensation plans and encourages, but does not require,
entities to adopt that method in place of APB Opinion No. 25, ACCOUNTING FOR
STOCK ISSUED TO EMPLOYEES, which uses an intrinsic value-based accounting
method. Kelly Russell does not intend to adopt SFAS 123 in measuring expenses.
However, Kelly Russell must present pro forma net income (loss) and related per
share amounts as if SFAS 123 had been adopted, and such pro forma amounts are
expected to reflect higher amounts of expenses than amounts reported in the
financial statements.
F-26
<PAGE>
KELLY RUSSELL STUDIOS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
1. NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
RECLASSIFICATIONS -- Certain of the 1993 and 1994 amounts have been
reclassified to conform with the 1995 presentation. These reclassifications had
no effect on net loss or shareholders' equity.
2. INVENTORIES
The components of inventories at December 31 are as follows:
<TABLE>
<CAPTION>
1994 1995
------------- -----------
<S> <C> <C>
Raw materials............................................................... $ 1,206,555 $ 565,716
Finished goods.............................................................. 449,766 146,825
------------- -----------
1,656,321 712,541
Less inventory allowance.................................................... 990,000 340,171
------------- -----------
$ 666,321 $ 372,370
------------- -----------
------------- -----------
</TABLE>
3. FINANCING AGREEMENTS
PARTICIPATING PROMISSORY NOTES -- In January 1994, Kelly Russell repaid 7
percent participating promissory notes totaling $300,000 in connection with the
issuance of the convertible debentures described below. In connection with this
transaction, the holders of the participating promissory notes were granted
60,000 warrants to purchase common stock of Kelly Russell at $1.00 per share. In
1994, Kelly Russell recorded financing expense of $120,000 relating to the
issuance of these warrants. The warrants are subject to antidilution provisions
and expire February 1998.
CONVERTIBLE DEBENTURES -- In January and February 1994, Kelly Russell issued
$900,000 of convertible debentures. These debentures bore interest at 7 percent,
were subordinated to the bank debt, and were due in January 1995. These
debentures were converted into 399,986 shares of Kelly Russell common stock upon
the successful completion of the initial public offering in March 1994.
4. INCOME TAXES
Income tax expense (benefit) differs from the federal statutory rate as
follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31
----------------------------------------
1993 1994 1995
---------- -------------- ------------
<S> <C> <C> <C>
Tax provision at statutory rate.............................. $ (81,000) $ (1,773,000) $ (525,000)
State income taxes, net of federal tax effect................ (15,000) (105,000) (92,000)
Nondeductible expenses....................................... 14,000 6,000 7,000
Change in valuation allowance for deferred tax assets........ 82,000 1,872,000 856,000
Effect of change of tax rates on deferred taxes.............. -- -- (246,000)
---------- -------------- ------------
$ -- $ -- $ --
---------- -------------- ------------
---------- -------------- ------------
</TABLE>
F-27
<PAGE>
KELLY RUSSELL STUDIOS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
4. INCOME TAXES (CONTINUED)
Net deferred tax assets consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31
----------------------------
1994 1995
------------- -------------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards........................................ $ 1,387,000 $ 2,570,000
Inventory allowances.................................................... 356,000 140,000
Trade receivable allowances............................................. 201,000 65,000
Other................................................................... 15,000 40,000
------------- -------------
1,959,000 2,815,000
Less valuation allowance.................................................. 1,959,000 2,815,000
------------- -------------
$ -- $ --
------------- -------------
------------- -------------
</TABLE>
At December 31, 1994 and 1995, Kelly Russell recorded a valuation allowance
on the deferred tax assets to reduce the total to an amount that management
believes will ultimately be realized. Realization of deferred tax assets is
dependent upon sufficient future taxable income during the period that
deductible temporary differences and carryforwards are expected to be available
to reduce taxable income.
At December 31, 1995, Kelly Russell had net operating loss (NOL)
carryforwards available to reduce future taxable income expiring as follows:
<TABLE>
<CAPTION>
YEAR EXPIRING
- -------------------------------------------------------------------------------
<S> <C>
2008......................................................................... $ 225,000
2009......................................................................... 3,697,000
2010......................................................................... 2,504,000
-------------
$ 6,426,000
-------------
-------------
</TABLE>
As a result of the changes in stock ownership during 1994 and 1995, the
amount of net operating loss carryforward that may be utilized annually is
limited. In addition, the planned merger (see Note 12) may further limit the
annual availability of the NOL carryforwards.
5. STOCK OPTIONS
Kelly Russell has a stock plan pursuant to which restricted stock and
options for up to 750,000 shares of common stock have been reserved for issuance
under the plan and may be granted to employees and directors. These options may
be either incentive stock options or nonstatutory stock options. All incentive
options must be granted at no less than 100 percent of the fair market value of
the stock on the date of the grant, or 110 percent for employees owning more
than 10 percent of Kelly Russell Common stock. All nonstatutory options must be
granted at no less than 85 percent of fair market value on the date of grant.
The options expire at varying dates not to exceed ten years from the grant date
and are not transferable.
In November 1995, Kelly Russell established the 1995 Consultant Stock Option
Plan pursuant to which stock and options for up to 150,000 shares of common
stock have been reserved for issuance under the Plan and may be granted to
outside consultants.
F-28
<PAGE>
KELLY RUSSELL STUDIOS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
5. STOCK OPTIONS (CONTINUED)
A summary of outstanding stock options under both plans is as follows:
<TABLE>
<CAPTION>
NUMBER OF
PRICE RANGE SHARES
-------------- -----------
<S> <C> <C>
Outstanding at December 31, 1993.......................................... $ -- --
Granted................................................................. 2.25 - 2.48 425,000
Canceled................................................................ 2.25 - 2.48 (409,000)
-------------- -----------
Outstanding at December 31, 1994.......................................... 2.25 - 2.48 16,000
Granted................................................................. 1.50 - 2.50 1,489,000
Canceled................................................................ 2.25 (416,363)
Exercised............................................................... 2.25 (637)
-------------- -----------
Outstanding at December 31, 1995.......................................... $ 1.50 - 2.50 1,088,000
-------------- -----------
-------------- -----------
</TABLE>
As of December 31, 1995, 135,800 options were exercisable.
6. STOCK WARRANTS
In February and March 1995, Kelly Russell granted warrants to purchase
641,000 shares of common stock at $2.00 per share in connection with a private
placement of common stock. In addition, Kelly Russell granted warrants to the
selling agent of this private placement for the purchase of a total of 185,200
shares of common stock at $2.00 per share.
A summary of the outstanding stock warrants follows, for which shares of
Kelly Russell's common stock have been reserved for issuance (see also Notes 3
and 9):
<TABLE>
<CAPTION>
NUMBER OF
PRICE RANGE SHARES
-------------- ----------
<S> <C> <C>
Outstanding at December 31, 1992........................................... $1.00 250,000
Granted.................................................................. 1.00 110,000
-------------- ----------
Outstanding at December 31, 1993........................................... 1.00 360,000
Granted.................................................................. 1.00 - 4.20 418,889
Canceled................................................................. 1.00 (300,000)
-------------- ----------
Outstanding at December 31, 1994........................................... 1.00 - 4.20 478,889
Granted.................................................................. 2.00 797,700
Exercised................................................................ 2.00 (926,000)
-------------- ----------
Outstanding at December 31, 1995........................................... $1.00 - 4.20 350,589
-------------- ----------
-------------- ----------
</TABLE>
As of December 31, 1995, 165,839 warrants were exercisable.
F-29
<PAGE>
KELLY RUSSELL STUDIOS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
7. MAJOR CUSTOMERS AND SUPPLIER
MAJOR CUSTOMERS -- Net sales for 1993, 1994 and 1995 include sales to the
following major customers, together with the receivables due from those
customers:
<TABLE>
<CAPTION>
NET SALES
-------------------------------------
1993 1994 1995
----------- ----------- -----------
<S> <C> <C> <C>
Customer
A.................................................... $ * $ 456,078 $ 226,377
B.................................................... * * 348,246
C.................................................... 410,411 * *
D.................................................... 275,850 * *
----------- ----------- -----------
$ 686,261 $ 456,078 $ 574,623
----------- ----------- -----------
----------- ----------- -----------
</TABLE>
- ------------------------
*Net sales were not significant for period presented.
<TABLE>
<CAPTION>
TRADE RECEIVABLE
BALANCE
AS OF DECEMBER 31
----------------------
1994 1995
--------- -----------
<S> <C> <C>
Customer
A............................................................... $ 49,917 $ 37,229
B............................................................... -- 154,144
--------- -----------
$ 49,917 $ 191,373
--------- -----------
--------- -----------
</TABLE>
MAJOR SUPPLIER -- In 1995, Kelly Russell utilized an independent contractor
to assemble, warehouse, and ship its products. Kelly Russell purchased
approximately $253,000 from this contractor during 1995. In January 1996, Kelly
Russell changed contractors for those services. Management believes that
alternative contractors are available in the event Kelly Russell is unable to
obtain services from their current contractor.
8. COMMITMENTS AND CONTINGENCIES
LEASES -- Kelly Russell leases its office facility under a noncancelable
agreement which expires May 2001. The lease requires additional payments for a
proportionate share of real estate taxes and operating expenses. In addition,
Kelly Russell leases certain equipment under noncancelable operating leases with
varying monthly payments to July 1997. Approximate future minimum payments,
exclusive of other costs, required under these operating leases are as follows:
<TABLE>
<CAPTION>
YEARS ENDING
DECEMBER 31
- ---------------------------------------------------------------------------------
<S> <C>
1996........................................................................... $ 87,300
1997........................................................................... 80,000
1998........................................................................... 63,200
1999........................................................................... 63,200
2000........................................................................... 63,200
Thereafter..................................................................... 26,300
-----------
$ 383,200
-----------
-----------
</TABLE>
Total rent expense was approximately $78,000, $177,000, and $95,000 for
1993, 1994 and 1995, respectively.
F-30
<PAGE>
KELLY RUSSELL STUDIOS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
8. COMMITMENTS AND CONTINGENCIES (CONTINUED)
LICENSE AGREEMENTS -- Kelly Russell has entered into license agreements with
various organizations that represent the major sports leagues and their member
teams, players' associations, entertainment companies, and others which provide
Kelly Russell the ability to produce and distribute products with images owned
or approved by these third parties. These agreements generally are for periods
of one to three years and contain minimum license provisions. Approximate future
minimum payments required under these agreements are as follows:
<TABLE>
<CAPTION>
YEARS ENDING
DECEMBER 31
- ---------------------------------------------------------------------------------
<S> <C>
1996........................................................................... $ 355,000
1997........................................................................... 270,000
1998........................................................................... 62,000
-----------
$ 687,000
-----------
-----------
</TABLE>
LITIGATION -- Kelly Russell is subject to legal proceedings and claims which
arise in the ordinary course of its business. Kelly Russell has accrued
approximately $100,000 as of December 31, 1995, which represents management's
estimate of the cost of settling certain of those claims.
9. RESTRUCTURING, REORGANIZATION OF THE COMPANY, AND FOURTH QUARTER ADJUSTMENTS
1995 restructuring and fourth quarter adjustments -- In December 1995, Kelly
Russell recorded charges to operations of approximately $926,000 relating to the
write-down of certain assets in the fourth quarter and a restructuring of Kelly
Russell.
1995 FOURTH QUARTER ADJUSTMENTS -- After experiencing lower than expected
sales levels in the fourth quarter, Kelly Russell recorded a charge to
operations of approximately $640,000 relating to increased allowances for
inventory obsolescence and sales returns. In addition, Kelly Russell recorded a
liability of $100,000 for estimated costs associated with various litigation
matters (see Note 8).
1995 BUSINESS RESTRUCTURING -- On February 20, 1996, Kelly Russell revised
its business plan and operations to produce and distribute a more limited number
of print images. Accordingly, Kelly Russell recorded a restructuring charge of
approximately $186,000 relating to the write-down of inventories, prepaid
licensing rights, and original artwork. Additionally, Kelly Russell accepted the
resignation of the Chief Executive Officer and terminated several employees.
Kelly Russell has not recorded any employee termination benefits or other exit
costs as a part of the restructuring charge, since management believes such
costs will be immaterial.
1994 reorganization and fourth quarter adjustments -- In December 1994,
Kelly Russell recorded charges to operations of approximately $2,460,000
relating to the write-down of certain assets in the fourth quarter and a
reorganization of Kelly Russell.
1994 FOURTH QUARTER ADJUSTMENTS -- In November 1994, the Board of Directors
terminated the employment agreements with its two principal officers and
founding shareholders. The terminated officers/shareholders agreed to, among
other things, return to Kelly Russell 900,000 shares of Kelly Russell's common
stock held by them, including 240,000 shares of restricted common stock.
Additionally, the termination required the forfeiture and cancellation of
400,000 stock options outstanding to the officers/shareholders. Compensation
expense related to the restricted common stock and stock options of $246,317 was
recorded during the first three quarters of 1994. The compensation expense was
reversed in the fourth quarter of 1994 as a result of the return and
cancellation of these securities. Additionally, Kelly Russell recorded a gain of
$85,978 to other income upon cancellation of these shares.
F-31
<PAGE>
KELLY RUSSELL STUDIOS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
9. RESTRUCTURING, REORGANIZATION OF THE COMPANY, AND FOURTH QUARTER
ADJUSTMENTS (CONTINUED)
During the fourth quarter of 1994, Kelly Russell recorded charges to
operations totaling $1,370,000 relating to increased allowances for returns on
guaranteed sales, bad debts, inventory obsolescence, and inventory valuation
adjustments. This fourth quarter adjustment should have been partially recorded
in the earlier quarters of 1994.
1994 BUSINESS REORGANIZATION -- During the quarter ended December 31, 1994,
Kelly Russell hired two new officers and revised its business plan and
operations to focus solely on the creation, marketing, and sales of limited
edition art collectibles through mass merchants, distributors, and specialty
retail stores. Kelly Russell discontinued the sales of its software and ceramic
mug lines and decreased the number of print images in its product line. Sales
from the discontinued product lines were approximately $116,000 in 1994. Kelly
Russell also began outsourcing its assembly and warehousing activities and
eliminated most of its employee sales force. In addition, Kelly Russell
eliminated its practice of offering guaranteed return privileges to certain
customers. As a result of the reorganization, management recorded a charge of
$1,088,876 to operations, of which $997,288 was included in cost of sales to
write off assets and other costs no longer usable or realizable.
10. GOING CONCERN CONSIDERATIONS
The accompanying financial statements have been prepared in conformity with
generally accepted accounting principles, which contemplate continuation of
Kelly Russell as a going concern. Kelly Russell has suffered losses since
inception totaling $7,150,939. In addition, Kelly Russell consumed $2,206,265 of
cash in operating activities during 1995. In order for Kelly Russell to realize
its investments in its assets and meet its obligations when due, it must attain
a level of operations which will provide sustained positive cash flow. As
discussed in Notes 9 and 12, Kelly Russell has restructured its business in an
effort to improve income and cash flow from operations and has plans to merge
with another company during 1996. However, there is no assurance Kelly Russell's
financial performance will improve, or that the planned merger will be
consummated. Therefore, there is substantial doubt about Kelly Russell's ability
to continue as a going concern. The financial statements do not include any
adjustments relating to the recoverability and classification of recorded asset
amounts or the amounts and classification of liabilities that might result from
the outcome of these uncertainties.
11. EXTRAORDINARY ITEM
During 1995, Kelly Russell settled and paid the past due accounts payable
balances with certain vendors for less than amounts owed, resulting in
extraordinary income of $296,994. There is no income tax effect on the
extraordinary income because of Kelly Russell's net operating loss.
12. SUBSEQUENT EVENTS (UNAUDITED)
MERGER -- On May 28, 1996, Kelly Russell entered into a Final Amended and
Restated Agreement and Plan of Reorganization ("Merger Agreement") with OSP
Publishing, Inc. ("OSP"), its subsidiary, The Button Exchange, Ltd. ("BEx"),
OSP's shareholders, Global One Distribution & Merchandising Inc. ("Global One")
and its subsidiaries. Pursuant to the Merger Agreement, Kelly Russell will
combine its operations with OSP, its subsidiary Stanley DeSantis, Inc. ("SDI")
and BEx. OSP is a publisher of licensed posters, SDI develops and markets
licensed and nonlicensed T-shirts, sweatshirts, boxer shorts and mugs, and BEx
develops and markets licensed and nonlicensed buttons, key rings and stickers.
To effectuate this reorganization, a new corporation, Global One, a Delaware
corporation has been formed, and Global One has formed three wholly-owned
Delaware subsidiaries, KRSI Acquisition Corp. ("KRSI Acquisition"), OSP
Acquisition Corp. ("OSP Acquisition"), and BEx Acquisition Corp. ("BEx
Acquisition"). As part of the reorganization, Kelly Russell will be merged with
and into KRSI Acquisition, KRSI Acquisition being the surviving company, and OSP
and BEx will be merged with and into OSP Acquisition and BEx Acquisition,
respectively. As a result, Global
F-32
<PAGE>
KELLY RUSSELL STUDIOS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
12. SUBSEQUENT EVENTS (UNAUDITED) (CONTINUED)
One will be the holding company for the operations formerly conducted by Kelly
Russell, OSP, SDI and BEx. Following consummation of the merger, KRSI
Acquisition will change its name and conduct its business under the name "Kelly
Russell Studios, Inc."
Kelly Russell's shareholders will receive one share of Global One Common
Stock for every two shares of Kelly Russell's Common Stock outstanding at
closing. The closing of the Merger Agreement will be subject to various
conditions, including approval of the merger by Kelly Russell's shareholders at
a special meeting and the successful placement of at least 4,000,000 shares of
Global One Common Stock at $1.50 per share. Kelly Russell currently anticipates
that the special meeting of shareholders will be held sometime in August 1996.
In connection with the merger, Kelly Russell has delivered $125,000 to an escrow
account and is obligated to deposit an additional $125,000 in the escrow
account. In the event the Merger Agreement is terminated by Kelly Russell, the
escrow agent may be obligated to deliver the escrowed funds to OSP as liquidated
damages for such termination.
STOCK OPTIONS -- A summary of outstanding stock options as of May 15, 1996
follows:
<TABLE>
<CAPTION>
PRICE RANGE NUMBER OF SHARES
-------------- -----------------
<S> <C> <C>
Outstanding at December 31,
1995.......................... $ 1.50 - 2.50 1,088,000
Granted...................... 0.75 125,000
Cancelled.................... 1.50 - 2.50 (355,650)
-------------- -----------------
Outstanding at May 15, 1996.... $ 0.75 - 2.50 857,350
-------------- -----------------
-------------- -----------------
</TABLE>
LITIGATION -- In May 1996, Kelly Russell settled certain outstanding
litigation for $133,000. (See Note 8).
F-33
<PAGE>
KELLY RUSSELL STUDIOS, INC.
CONDENSED BALANCE SHEET
ASSETS
<TABLE>
<CAPTION>
MARCH 31, 1996
--------------
(UNAUDITED)
<S> <C>
Current assets
Cash............................................................................................ $ 37,962
Trade receivables, less allowances of $71,000................................................... 514,163
Inventories..................................................................................... 276,597
Prepaid and other expenses...................................................................... 57,656
Prepaid licensing rights........................................................................ 132,627
Escrow deposit.................................................................................. 100,000
--------------
Total current assets.......................................................................... 1,119,005
--------------
Property & equipment
Property and equipment, net of accumulated depreciation of $143,240............................. 278,324
--------------
Total assets.................................................................................. $ 1,397,329
--------------
--------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Accounts payable................................................................................ $ 541,425
Accrued expenses................................................................................ 167,927
License fees payable............................................................................ 49,081
--------------
Total current liabilities..................................................................... 758,433
--------------
Shareholders' equity
Common stock, par value $.01; authorized 10,000,000 shares; 4,082,373 shares issued and
outstanding.................................................................................... 40,824
Additional paid in capital...................................................................... 8,133,560
Deferred compensation expense................................................................... --
Accumulated deficit............................................................................. (7,535,488)
--------------
Total shareholders' equity.................................................................... 638,896
--------------
Total liabilities and shareholders' equity.................................................... $ 1,397,329
--------------
--------------
</TABLE>
See notes to condensed financial statements (unaudited).
F-34
<PAGE>
KELLY RUSSELL STUDIOS, INC.
CONDENSED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
THREE MONTHS ENDED
------------------------
MARCH 31, MARCH 31,
1995 1996
----------- -----------
(UNAUDITED)
<S> <C> <C>
Net sales.............................................................................. $ 512,863 $ 778,614
Cost of sales:
Cost of goods sold................................................................... 220,884 338,503
License and royalty expenses......................................................... 56,520 114,235
----------- -----------
Total cost of sales................................................................ 277,404 452,738
----------- -----------
Gross profit......................................................................... 235,459 325,876
Operating expenses..................................................................... 451,950 708,401
----------- -----------
Operating loss..................................................................... (216,491) (382,525)
Net interest income (expense).......................................................... -- (2,024)
----------- -----------
Net loss before income taxes and extraordinary item................................ (216,491) (384,549)
Federal and state income taxes......................................................... -- --
----------- -----------
Net loss before extraordinary item................................................. (216,491) (384,549)
Extraordinary item..................................................................... 246,697 --
----------- -----------
Net income (loss).................................................................. $ 30,206 $ (384,549)
----------- -----------
----------- -----------
Net income (loss) per common and common equivalent shares:
Net loss before extraordinary item................................................... $ (0.07) $ (0.09)
Extraordinary item................................................................... 0.08 --
----------- -----------
Net income (loss).................................................................. $ 0.01 $ (0.09)
----------- -----------
----------- -----------
Weighted average number of common and common equivalent shares outstanding............. 3,286,765 4,082,373
----------- -----------
----------- -----------
</TABLE>
See notes to condensed financial statements (unaudited).
F-35
<PAGE>
KELLY RUSSELL STUDIOS, INC.
CONDENSED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
THREE MONTHS ENDED
--------------------------
MARCH 31, MARCH 31,
1995 1996
------------ ------------
(UNAUDITED)
<S> <C> <C>
Cash flows from operating activities:
Net income (loss)................................................................... $ 30,206 $ (384,549)
Adjustments to reconcile net income (loss) to net cash used in operating
activities:........................................................................
Depreciation...................................................................... 22,281 34,009
Provision for trade receivable allowances......................................... (230,000) (89,667)
Provision for obsolete inventories................................................ (706,000) (633)
Gain (loss) on disposal of assets................................................. -- 2,601
Noncash compensation expense, net................................................. (392) --
Changes in assets and liabilities:
Trade receivables............................................................... 407,191 285,492
Inventories..................................................................... 702,340 96,406
Prepaid and other expenses...................................................... (2,276) (31,226)
Prepaid licensing rights........................................................ 19,334 43,318
Accounts payable and accrued expenses........................................... (543,879) (67,427)
License fee payable............................................................. (205,256) (7,980)
------------ ------------
Net cash used in operating activities......................................... (506,451) (119,656)
------------ ------------
Cash flows from investing activities:
Purchase of equipment............................................................... (5,958) --
Escrow deposit...................................................................... -- (100,000)
------------ ------------
Net amount used in investing activities....................................... (5,958) (100,000)
------------ ------------
Cash flows from financing activities:
Proceeds from sale of common stock, net of expenses................................. 569,450 --
------------ ------------
Net cash provided by financing activities..................................... 569,450 --
------------ ------------
Net increase (decrease) in cash............................................... 57,041 (219,656)
Cash:
Beginning........................................................................... 403,840 257,618
------------ ------------
Ending.............................................................................. $ 460,881 $ 37,962
------------ ------------
------------ ------------
</TABLE>
See notes to condensed financial statements (unaudited)
F-36
<PAGE>
KELLY RUSSELL STUDIOS, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
1. UNAUDITED INTERIM RESULTS
The accompanying condensed balance sheet as of March 31, 1996, and the
condensed statements of operations and cash flows for the three month periods
ended March 31, 1995 and 1996, respectively, are unaudited and reflect all
adjustments, consisting of only normal recurring adjustments which, in the
opinion of management, are necessary for a fair statement of financial position,
results of operations and cash flows for the periods presented. These financial
statements are condensed and do not include all information required by
generally accepted accounting principles. These condensed financial statements
should be read in conjunction with Kelly Russell's year ended December 31, 1995
audited financial statements and notes thereto. The operating results for the
interim periods are not necessarily indicative of the operating results to be
expected for a full fiscal year.
2. INVENTORIES
The components of inventory as of March 31, 1996 are as follows:
<TABLE>
<S> <C>
Raw materials................................................... $ 485,208
Finished goods.................................................. 130,926
Less inventory allowance........................................ (339,537)
---------
$ 276,597
---------
---------
</TABLE>
3. NET INCOME (LOSS) PER SHARE
Net income (loss) per share is computed based upon the weighted average
number of common shares and dilutive common equivalent shares outstanding.
4. BUSINESS TRANSACTIONS
On March 28, 1996, Kelly Russell entered into a Final Amended and Restated
Agreement and Plan of Reorganization ("Merger Agreement") with OSP Publishing,
Inc. ("OSP"), its subsidiary, The Button Exchange, Ltd. ("BEx"), OSP's
shareholders, Global One Distribution & Merchandising Inc. ("Global One") and
its subsidiaries. Pursuant to the Merger Agreement, Kelly Russell will combine
its operations with OSP, its subsidiary Stanley DeSantis, Inc. ("SDI") and The
Button Exchange ("BEx"). OSP is a publisher of licensed posters, SDI develops
and markets licensed and nonlicensed T-shirts, sweatshirts, boxer shorts and
mugs, and BEx develops and markets licensed and nonlicensed buttons, key rings
and stickers. To effectuate this reorganization, a new corporation, Global One
Distribution & Merchandising, Inc. ("Global One"), a Delaware corporation has
been formed, and Global One has formed three wholly-owned Delaware subsidiaries,
KRSI Acquisition Corp. ("KRSI Acquisition"), OSP Acquisition Corp. ("OSP
Acquisition"), and BEx Acquisition Corp. ("BEx Acquisition"). As part of the
reorganization, Kelly Russell will be merged with and into KRSI Acquisition,
KRSI Acquisition being the surviving company, and OSP and BEx will be merged
with and into OSP Acquisition and BEx Acquisition, respectively. As a result,
Global One will be the holding company for the operations formerly conducted by
Kelly Russell, OSP, SDI and BEx. Following consummation of the merger, KRSI
Acquisition will change its name and conduct its business under the name "Kelly
Russell Studios, Inc."
Kelly Russell's shareholders will receive one share of Global One Common
Stock for every two shares of Kelly Russell's Common Stock outstanding at
closing. The closing of the Merger Agreement will be subject to various
conditions, including approval of the merger by Kelly Russell's shareholders at
a special meeting and the successful placement of at least 4,000,000 shares of
Global One Common Stock at $1.50 per share. Kelly Russell currently anticipates
that the special meeting of shareholders will be held sometime in August 1996.
In connection with the merger, Kelly Russell has delivered $125,000 to an escrow
account and is obligated to deposit an additional $125,000 in the escrow
account. In the event the Merger Agreement is terminated by Kelly Russell, the
escrow agent may be obligated to deliver the escrowed funds to OSP as liquidated
damages for such termination.
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APPENDIX A
- --------------------------------------------------------------------------------
FINAL AMENDED AND RESTATED
AGREEMENT AND PLAN OF REORGANIZATION
AMONG
GLOBAL ONE DISTRIBUTION & MERCHANDISING INC.
KELLY RUSSELL STUDIOS, INC.,
KRSI ACQUISITION CORP.,
OSP PUBLISHING, INC.,
O.S.P. ACQUISITION CORP.,
THE BUTTON EXCHANGE, LTD.,
BEX ACQUISITION CORP.,
JOSEPH C. ANGARD
AND
MICHAEL A. MALM
DATED MAY 28, 1996,
EFFECTIVE AS OF MARCH 27, 1996
- --------------------------------------------------------------------------------
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TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
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<S> <C> <C>
ARTICLE I -- DEFINITIONS..................................................................................... 2
ARTICLE II -- THE MERGERS................................................................................. 7
2.1 The Mergers....................................................................................... 7
2.2 Certificates of Merger; Effective Time............................................................ 7
2.3 Effect of the Mergers............................................................................. 7
2.4 Closing........................................................................................... 7
2.5 Certificates of Incorporation; By-laws............................................................ 8
2.6 Directors and Officers............................................................................ 8
ARTICLE III -- CONVERSION OR CANCELLATION OF SECURITIES; EXCHANGE OF CERTIFICATES............................
8
3.1 Conversion or Cancellation of Securities.......................................................... 8
3.2 Rights of Holders of OSP and KRSI Common Stock.................................................... 8
3.3 Exchange of Certificates.......................................................................... 9
ARTICLE IV -- THE OFFERING................................................................................... 9
ARTICLE V -- REPRESENTATIONS AND WARRANTIES OF GLOBAL ONE, OSP AND THE OSP SHAREHOLDERS......................
10
5.1 Corporate Existence and Power..................................................................... 10
5.2 OSP and Global One Subsidiaries................................................................... 10
5.3 Corporate Authorizations.......................................................................... 10
5.4 Governmental Authorization........................................................................ 11
5.5 Non-Contravention................................................................................. 11
5.6 Capitalization.................................................................................... 12
5.7 Financial Statements.............................................................................. 13
5.8 Books and Records................................................................................. 13
5.9 Contracts with Related Parties.................................................................... 13
5.10 Absence of Certain Changes or Events.............................................................. 13
5.11 Litigation........................................................................................ 14
5.12 Taxes............................................................................................. 14
5.13 Title to Assets................................................................................... 15
5.14 Labor Matters..................................................................................... 15
5.15 Employee Benefit Plans............................................................................ 15
5.16 Compliance with Laws.............................................................................. 16
5.17 Brokers........................................................................................... 16
5.18 Vote Required..................................................................................... 16
5.19 Environmental Matters............................................................................. 17
5.20 Trademarks, Patents and Copyrights................................................................ 17
5.21 Contracts and Other Agreements.................................................................... 17
5.22 Insurance......................................................................................... 18
5.23 Disclosure........................................................................................ 19
ARTICLE VI -- REPRESENTATIONS AND WARRANTIES OF KRSI......................................................... 19
6.1 Corporate Existence and Power..................................................................... 19
6.2 KRSI Subsidiaries................................................................................. 19
6.3 Corporate Authorization........................................................................... 19
6.4 Governmental Authorization........................................................................ 19
6.5 Non-Contravention................................................................................. 20
6.6 Capitalization.................................................................................... 20
6.7 SEC Documents..................................................................................... 21
6.8 KRSI's Books and Records.......................................................................... 21
6.9 KRSI Contracts with Related Parties............................................................... 21
6.10 Absence of Certain Changes or Events.............................................................. 21
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
PAGE
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6.11 Litigation........................................................................................ 22
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6.12 Taxes............................................................................................. 23
6.13 Title to Assets................................................................................... 23
6.14 Labor Matters..................................................................................... 23
6.15 Employee Benefit Plans............................................................................ 23
6.16 Compliance with Laws.............................................................................. 24
6.17 Brokers........................................................................................... 24
6.18 Vote Required..................................................................................... 24
6.19 Environmental Matters............................................................................. 25
6.20 Trademarks, Patents and Copyrights................................................................ 25
6.21 Contracts and Other Agreements.................................................................... 25
6.22 Insurance......................................................................................... 26
6.23 Disclosure........................................................................................ 27
ARTICLE VII -- COVENANTS RELATING TO CONDUCT OF BUSINESS..................................................... 27
7.1 Conduct of Business by Global One and OSP......................................................... 27
7.2 Conduct of Business by KRSI....................................................................... 29
7.3 Other Action...................................................................................... 31
7.4 No Solicitation of Transactions................................................................... 31
ARTICLE VIII -- ADDITIONAL AGREEMENTS..................................................................... 32
8.1 Preparation of Registration Statement and the Proxy Statement; Shareholders' Meeting.............. 32
8.2 Information Supplied by Global One and OSP........................................................ 33
8.3 Information Supplied by KRSI...................................................................... 33
8.4 Access to Information............................................................................. 33
8.5 Confidentiality................................................................................... 33
8.6 Public Announcements.............................................................................. 34
8.7 Appropriate Action; Consents; Filings............................................................. 34
8.8 State Statutes.................................................................................... 35
8.9 Directors' and Officers' Indemnification and Insurance............................................ 36
8.10 Escrow Payments................................................................................... 36
8.11 Employment Contracts.............................................................................. 37
8.12 Indemnification................................................................................... 37
ARTICLE IX -- CONDITIONS TO THE MERGERS...................................................................... 38
9.1 Conditions of the Parties' Obligations to Effect the KRSI Merger.................................. 38
9.2 Conditions of Obligation of KRSI.................................................................. 39
9.3 Conditions of Obligation of OSP................................................................... 40
ARTICLE X -- TERMINATION, AMENDMENT AND WAIVER............................................................... 41
10.1 Termination....................................................................................... 41
10.2 Consequences of Termination....................................................................... 42
10.3 Amendment......................................................................................... 43
10.4 Waiver............................................................................................ 43
ARTICLE XI -- GENERAL PROVISIONS............................................................................. 43
11.1 Survival of Representations and Warranties........................................................ 43
11.2 Notices........................................................................................... 43
11.3 Entire Agreement.................................................................................. 43
11.4 Severability...................................................................................... 43
11.5 Successors and Assigns............................................................................ 44
11.6 Parties in Interest............................................................................... 44
11.7 Enforcement....................................................................................... 44
11.8 Governing Law..................................................................................... 44
11.9 Counterparts; Effectiveness....................................................................... 44
</TABLE>
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FINAL AMENDED AND RESTATED
AGREEMENT AND PLAN OF REORGANIZATION
<TABLE>
<S> <C> <C>
DATE: May 28, 1996, Effective as of March 27, 1996
PARTIES: Global One Distribution & Merchandising Inc. ("Global One")
O.S.P. Acquisition Corp. ("OSP Acquisition")
KRSI Acquisition Corp. ("KRSI Acquisition")
BEx Acquisition Corp. ("BEx Acquisition")
5548 Lindbergh Lane
Bell, CA 90201-6410
Facsimile Number: (213) 263-9419
Kelly Russell Studios, Inc. ("KRSI")
2905 Northwest Boulevard, Suite 220
Plymouth, MN 55441
Facsimile Number: (612) 553-9960
OSP Publishing, Inc. ("OSP")
5548 Lindbergh Lane
Bell, CA 90201-6410
Facsimile Number: (213) 263-9419
The Button Exchange, Ltd. ("BEx")
200 Diversion Street, #G11
Rochester, MI 48307
Facsimile Number: (313) 650-7809
Joseph C. Angard ("Angard")
OSP Publishing, Inc.
5548 Lindbergh Lane
Bell, CA 90201-6410
Facsimile Number: (213) 263-9258
Michael A. Malm ("Malm")
OSP Publishing, Inc.
5548 Lindbergh Lane
Bell, CA 90201-6410
Facsimile Number: (213) 263-9419
</TABLE>
RECITALS:
A. KRSI creates, markets and distributes products bearing realistic sports
images.
B. OSP and its subsidiaries manufacture, publish and distribute licensed
posters, buttons, T-shirts and other apparel and gift items.
C. Angard and Malm are the sole shareholders of both OSP and Global One,
and OSP owns 79% of the outstanding shares of BEx.
D. The Boards of Directors of Global One, KRSI, KRSI Acquisition, OSP, OSP
Acquisition, BEx and BEx Acquisition have determined that it is in the best
interests of their respective companies and their shareholders to combine their
respective businesses under common management and to raise additional equity
capital through Global One.
E. On March 27, 1996, OSP, KRSI, Angard and Malm entered into an Agreement
and Plan of Reorganization (the "Original Agreement") to effect a proposed
merger of KRSI with and into OSP. Subsequent thereto, the parties have
determined that it is in their respective best interests to amend and restate
such agreement pursuant to Section 10.3 thereof to provide that: (i) OSP will be
merged
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with and into OSP Acquisition with OSP Acquisition being the surviving entity;
(ii) KRSI will be merged with and into KRSI Acquisition with KRSI Acquisition
being the surviving entity; (iii) BEx will be merged with and into BEx
Acquisition with BEx Acquisition being the surviving entity; (iv) Global One,
OSP Acquisition, KRSI Acquisition, BEx and BEx Acquisition will be parties to
the amended and restated agreement; and (iv) Global One will issue a minimum of
4,000,000 additional shares of Global One Common Stock, all upon the terms and
subject to the conditions of this Final Amended and Restated Agreement and Plan
of Reorganization.
AGREEMENT:
The parties hereto, each intending to be legally bound, agree that the
Original Agreement is hereby amended in its entirety and restated as follows:
ARTICLE I -- DEFINITIONS
As used herein, the following words and terms shall have the meanings set
forth below:
1.1 The "Acquisition Companies" shall mean KRSI Acquisition, OSP
Acquisition and BEx Acquisition.
1.2 "Angard" shall mean Joseph C. Angard.
1.3 "BEx" shall mean The Button Exchange, Ltd., a Michigan corporation.
1.4 "BEx Acquisition" shall mean BEx Acquisition Corp., a Delaware
corporation and wholly-owned subsidiary of Global One.
1.5 "BEx Merger" shall mean the merger of BEx with and into BEx
Acquisition, as further described in Section 2.1(i)(B) hereto.
1.6 "BEx Certificates of Merger" shall mean the documents attached hereto
as Exhibit 1.6.
1.7 "BEx Shares" shall mean the issued and outstanding shares of common
stock, $1.00 par value, of BEx.
1.8 "CGCL" shall mean the California General Corporation Law, as amended.
1.9 "Closing" shall mean the closing of the Mergers as discussed in Section
2.4 below.
1.10 "Closing Date" shall mean the date on which the Closing occurs.
1.11 "Code" shall mean the Internal Revenue Code of 1986, as amended.
1.12 "Competing Transaction" shall mean any of the following (other than
the transactions contemplated hereby): (i) any merger, consolidation, share
exchange, business combination, or other similar transaction involving Global
One, OSP, KRSI or BEx, (ii) any sale, lease, exchange, mortgage, pledge,
transfer or other disposition of 50% or more of the assets of Global One, OSP,
any of their respective subsidiaries or KRSI, taken as a whole, in a single
transaction or series of transactions, other than in the ordinary course of
business, (iii) any tender offer or exchange offer for 50% or more of the Global
One Shares, the OSP Shares or the KRSI Shares or the filing of a registration
statement under the Securities Act in connection therewith, (iv) any person
having acquired beneficial ownership or the right to acquire beneficial
ownership of, or any "group" (as such term is defined under Section 13(d) of the
Exchange Act and the rules and regulations promulgated thereunder) having been
formed which beneficially owns or has the right to acquire beneficial ownership
of, 50% or more of the Global One Shares, the OSP Shares or the KRSI Shares or
(v) any public announcement of a proposal, plan or intention to do any of the
foregoing or any agreement to engage in any of the foregoing other than any
transaction contemplated herein.
1.13 "DGCL" shall mean the Delaware General Corporation Law, as amended.
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1.14 "Effective Time" shall mean the time that the KRSI Merger becomes
effective pursuant to Section 2.2 below.
1.15 "Environment Laws" shall mean all federal, state and local laws,
rules, regulations, ordinances and orders that purport to regulate the release
of hazardous substances or other materials into the environment, or impose
requirements relating to environmental protection.
1.16 "ERISA" shall mean the Employee Retirement Income Security Act of
1974, as amended.
1.17 "Escrow Agent" shall mean Manatt, Phelps & Phillips, LLP.
1.18 "Escrow Agreement" shall mean that certain Escrow Agreement dated
March 27, 1996 by and among KRSI, OSP and the Escrow Agent, to hold the escrow
payments made by KRSI referred to in Section 8.10 below.
1.19 "Evaluation Materials" shall mean any business and/or technical
information of the Other Party or any of its subsidiaries designated orally or
in writing as "Confidential" or "Proprietary" (or in like words) or of a type
typically regarded as confidential or proprietary, whether or not so designated,
including, but not limited to, systems, processes, formulae, data, functional
specifications, computer programs, blueprints, know-how, improvements,
discoveries, developments, designs, inventions, techniques, new products,
marketing and advertising methods, supplier agreements, customer lists, pricing
policies, financial information, projections, forecasts, strategies, budgets or
other information related to its business or its customers.
1.20 "Exchange Act" shall mean the Securities Exchange Act of 1934, as
amended.
1.21 "Exchange Agent" shall mean Norwest Bank National Association.
1.22 "Exchange Ratio" shall mean the number determined by dividing the sum
of (a) fifty percent (50%) of the amount of Fully Diluted KRSI Shares plus (b)
the amount of New Global One Shares not in excess of 4,000,000, by the sum of
(y) the number of OSP Shares immediately prior to the Effective Time and (z) the
number of shares of OSP Common Stock that would be issued immediately prior to
the Effective Time if all the holders of outstanding warrants, options and any
other rights to acquire OSP Common Stock were exercised immediately prior to the
Effective Time.
1.23 "Fully Diluted KRSI Shares" shall mean the number of shares determined
by adding (a) all KRSI Shares immediately prior to the Effective Time and (b)
all of the shares of KRSI Common Stock that would be issued immediately prior to
the Effective Time if all of the outstanding warrants, options and any other
rights to acquire KRSI Common Stock were exercised immediately prior to the
Effective Time (excluding any warrants being issued to the OSP Financial Advisor
and the KRSI Financial Advisor and any other warrants being issued in connection
with the transactions contemplated herein).
1.24 "Global One" shall mean Global One Distribution & Merchandising Inc.,
a Delaware corporation.
1.25 "Global One Common Stock" shall mean the common stock, $.01 value, of
Global One.
1.26 "Global One Plans" shall mean all employee benefit plans (as defined
in Section 3(3) of ERISA), if any, which Global One or any of its subsidiaries
maintains or to which Global One or any of its subsidiaries contributes.
1.27 "Global One Shares" shall mean all issued and outstanding shares of
Global One Common Stock.
1.28 "Governmental Entity" shall mean any federal, state, local or foreign
governmental body, agency, official or authority (including courts,
administrative agencies, commissions, self-regulatory agencies or authorities or
other governmental authority or instrumentality).
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1.29 "Hazardous Materials" means any "hazardous waste" as defined in either
the United States Resource Conservation and Recovery Act or regulations adopted
pursuant to said act, any "hazardous substances" or "hazardous materials" as
defined in the United States Comprehensive Environmental Response, Compensation
and Liability Act and, to the extent not included in the foregoing, any medical
waste.
1.30 "Knowledge" shall mean actual knowledge of a fact or constructive
knowledge if a reasonably prudent person in a like position would have known or
should have known, the fact. In the case of a corporate party hereto knowledge
shall be limited to the aggregate knowledge of all of the officers of such
corporation.
1.31 "KRSI" shall mean Kelly Russell Studios, Inc., a Minnesota
corporation.
1.32 "KRSI Acquisition" shall mean KRSI Acquisition Corp., a Delaware
corporation and wholly-owned subsidiary of Global One.
1.33 "KRSI Certificates of Merger" shall mean the documents attached hereto
as Exhibit 1.33.
1.34 "KRSI Common Stock" shall mean the common stock of KRSI with a par
value of $.01 per share.
1.35 "KRSI Financial Advisor" shall mean The Equisource Group.
1.36 "KRSI Merger" shall mean the merger of KRSI with and into KRSI
Acquisition, as further described in Section 2.1(ii) hereto.
1.37 "KRSI Plans" shall mean all employee benefit plans (as defined in
Section 3(3) of ERISA) which KRSI or any of its subsidiaries maintains or to
which KRSI or any of its subsidiaries contributes.
1.38 "KRSI SEC Documents" shall mean all required reports, schedules,
forms, statements and other documents filed or required to be filed by KRSI with
the SEC since December 31, 1992.
1.39 "KRSI Shares" shall mean all issued and outstanding shares of KRSI
Common Stock.
1.40 "Lien" shall mean any pledge, claim, lien, charge, encumbrance or
security interest of any nature whatsoever.
1.41 "Malm" shall mean Michael A. Malm.
1.42 "Material Adverse Effect" when used with respect to any entity means
(a) a material adverse effect on the business, assets (including intangible
assets), liabilities, financial condition, results of operations or prospects of
such entity and its subsidiaries, if any, taken as a whole, or on the ability of
such entity or any of its subsidiaries following the consummation of the
Reorganization to continue the business of such entity and its subsidiaries, if
any, taken as a whole, substantially as currently conducted (without the loss of
any material rights), or (b) a material impairment in the ability of such entity
or any of its subsidiaries to perform any of their respective obligations under
this Agreement or to consummate any portion of the Reorganization.
1.43 "MIBCA" shall mean the Michigan Business Corporation Act, as amended.
1.44 "MNBCA" shall mean the Minnesota Business Corporation Act, as amended.
1.45 "Mergers" shall mean the KRSI Merger, the OSP Merger and the BEx
Merger.
1.46 "New Global One Shares" shall mean the shares of Global One Common
Stock issued in the Offering.
1.47 "Offering" shall mean the offering of up to 4,666,667 Shares of Global
One Common Stock at $1.50 per share as more fully described herein.
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1.48 "OSP" shall mean OSP Publishing, Inc., a California corporation, and
unless the context otherwise requires, its successor, OSP Acquisition.
1.49 "OSP Acquisition" shall mean O.S.P. Acquisition Corp., a Delaware
corporation and wholly-owned subsidiary of Global One.
1.50 "OSP Affiliated Group" shall mean OSP, each of the entities listed on
Schedule 5.2 hereto, any other subsidiaries and each member of any affiliated,
consolidated, combined or unitary group of which OSP or any of its subsidiaries
is a member.
1.51 "OSP Certificates of Merger" shall mean the documents attached hereto
as Exhibit 1.51.
1.52 "OSP Common Stock" shall mean the common stock of OSP with no par
value.
1.53 "OSP Financial Advisor" shall mean Tamarix Capital Corporation.
1.54 "OSP Financial Statements" shall mean the balance sheets, statements
of operations, statements of changes in shareholders' equity, statements of cash
flows, reports thereon by OSP's independent auditors, if any, and any notes
thereto, which are referred to in Section 5.7 below.
1.55 "OSP Merger" shall mean the merger of OSP with and into OSP
Acquisition, as further described in Section 2.1(i)(A) hereto.
1.56 "OSP Plans" shall mean all employee benefit plans (as defined in
Section 3(3) of ERISA) which OSP or any of its subsidiaries maintains or to
which OSP or any of its subsidiaries contributes.
1.57 "OSP Shareholders" shall mean collectively Angard and Malm.
1.58 "OSP Shares" shall mean all issued and outstanding shares of OSP
Common Stock, and "OSP Share" shall mean one outstanding share of OSP Common
Stock.
1.59 "Other Party" or "Other Parties," when used with reference to KRSI
shall mean Global One, OSP and their respective subsidiaries, when used with
respect to OSP or Global One, shall mean KRSI, unless the context otherwise
requires.
1.60 "Proxy Statement" shall mean the proxy statement to be filed by KRSI
pursuant to the provisions of Section 8.1 below.
1.61 "Registration Statement" shall mean the registration statement to be
filed by Global One on Form S-4 pursuant to the provisions of Section 8.1 below.
1.62 "Reorganization" shall mean the combination of the Mergers and the
Offering.
1.63 "SEC" shall mean the Securities and Exchange Commission.
1.64 "Securities Act" shall mean the Securities Act of 1933, as amended.
1.65 "Shareholders' Meeting" shall mean the meeting of the shareholders of
KRSI to be called to approve the KRSI Merger and this Agreement.
1.66 "State Takeover Laws" shall mean any state "control share
acquisition," "anti-takeover" or other similar statutes and regulations.
1.67 "Taxes" shall mean all federal, state, local and foreign income,
property, sales, excise and other taxes, tariffs or governmental charges of any
nature whatsoever, including any interest, penalties or additions with respect
thereto.
ARTICLE II -- THE MERGERS
2.1 THE MERGERS. Upon the terms and subject to the conditions set forth in
this Agreement, (i) immediately prior to the Effective Time (A) OSP shall be
merged with and into OSP Acquisition in accordance with the CGCL and the DGCL,
whereupon the separate existence of OSP shall cease and OSP Acquisition shall
continue as the surviving corporation, and (B) BEx shall be merged with and
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into BEx Acquisition in accordance with the MIBCA and the DGCL, whereupon the
separate existence of BEx shall cease and BEx Acquisition shall continue as the
surviving corporation; and (ii) at the Effective Time KRSI shall be merged with
and into KRSI Acquisition in accordance with the MNBCA and the DGCL, whereupon
the separate existence of KRSI shall cease and KRSI Acquisition shall continue
as the surviving corporation.
2.2 CERTIFICATES OF MERGER; EFFECTIVE TIME. As soon as practicable after
satisfaction or, to the extent permitted hereunder, waiver of all conditions to
the Mergers set forth in Article IX below, the parties hereto shall cause (i)
the KRSI Merger to be consummated by filing the KRSI Certificates of Merger with
the Secretary of State of the State of Minnesota and the Secretary of State of
the State of Delaware, and make all other filings or recordings required by the
MNBCA and the DGCL in connection with the KRSI Merger and the transactions
contemplated by this Agreement; (ii) the OSP Merger to be consummated by filing
the OSP Certificates of Merger with the Secretary of State of the State of
California and the Secretary of State of the State of Delaware, and make all
other filings or recordings required by the CGCL and the DGCL in connection with
the OSP Merger and the transactions contemplated by this Agreement; and (iii)
the BEx Merger to be consummated by filing the BEx Certificates of Merger with
the Secretary of State of the State of Michigan and the Secretary of State of
the State of Delaware, and make all other filings or recordings required by the
MIBCA and the DGCL in connection with the BEx Merger and the transactions
contemplated by this Agreement. Each of the KRSI Merger, the OSP Merger and the
BEx Merger shall become effective (a) at the later of such time as the
applicable Certificates of Merger are duly filed with the Secretaries of State
of the applicable states, or (b) at such later time as may be agreed by the
parties in writing and specified in the applicable Certificates of Merger.
2.3 EFFECT OF THE MERGERS. From and after the Effective Time, KRSI
Acquisition shall possess all the rights, privileges, powers and franchises and
be subject to all of the restrictions, disabilities and duties of KRSI and KRSI
Acquisition, as provided under the MNBCA and DGCL, OSP Acquisition shall possess
all the rights, privileges, powers and franchises and be subject to all of the
restrictions, disabilities and duties of OSP and OSP Acquisition, as provided
under the CGCL and DGCL, and BEx Acquisition shall possess all the rights,
privileges, powers and franchises and be subject to all of the restrictions,
disabilities and duties of BEx and BEx Acquisition, as provided under the MIBCA
and DGCL.
2.4 CLOSING. The Closing will take place at 10:00 a.m. on a date to be
specified by the parties, which shall be no later than the third business day
after satisfaction or waiver of all of the conditions set forth in Article IX,
at the offices of Manatt, Phelps & Phillips, LLP, in Los Angeles, California,
unless another date, time or place is agreed to in writing by all of the parties
hereto.
2.5 CERTIFICATES OF INCORPORATION; BY-LAWS.
(a) Immediately after the Effective Time, the certificates of
incorporation of Global One, KRSI Acquisition, OSP Acquisition and BEx
Acquisition shall be in substantially the forms attached hereto as Exhibits
2.5(a)-1, 2.5(a)-2, 2.5(a)-3 and 2.5(a)-4, respectively, until thereafter
amended as provided by law and such certificates of incorporation.
(b) Immediately after the Effective Time, the by-laws of Global One,
KRSI Acquisition, OSP Acquisition and BEx Acquisition shall be in
substantially the forms attached hereto as Exhibits 2.5(b)-1, 2.5(b)-2,
2.5(b)-3 and 2.5(b)-4, respectively, until thereafter amended as provided by
law, the applicable certificate of incorporation of the relevant corporation
and such by-laws.
2.6 DIRECTORS AND OFFICERS. The persons specified in Exhibit 2.6-1
attached hereto shall be the directors of Global One immediately after the
Effective Time, each to hold office in accordance with the certificate of
incorporation of Global One as of the Effective Time and for the terms set forth
in the by-laws of Global One as of the Effective Time and specified in Exhibit
2.6 hereto, and the officers of Global One immediately after the Effective Time
shall be the persons specified in Exhibit 2.6-2, in each case until their
respective successors are duly elected or appointed and qualified.
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ARTICLE III -- CONVERSION OR CANCELLATION
OF SECURITIES; EXCHANGE OF CERTIFICATES
3.1 CONVERSION OR CANCELLATION OF SECURITIES. By virtue of the Mergers and
without any action on the part of the holders of any of the OSP Shares, the KRSI
Shares or the BEx Shares, and subject to Section 3.3(b) below:
(a) immediately prior to the Effective Time, (i) each OSP Share as of
such time shall be converted into the right to receive the number of shares
of Global One Common Stock equal to the Exchange Ratio, and (ii) each BEx
Share as of such time shall be canceled and the holders thereof shall be
entitled to no consideration except as set forth in this Agreement; and
(b) as of the Effective Time, each KRSI Share immediately prior to the
Effective Time shall be converted into one-half share of Global One Common
Stock.
3.2 RIGHTS OF HOLDERS OF OSP AND KRSI COMMON STOCK. On and after the
Effective Time and until surrendered for exchange, each outstanding stock
certificate which immediately prior to the Mergers represented shares of OSP
Common Stock and KRSI Common Stock shall be deemed for all purposes, except as
provided in Section 3.3(b) below, to evidence ownership of and to represent the
number of whole shares of Global One Common Stock into which such shares of OSP
Common Stock or KRSI Common Stock shall have been converted, and the record
holder of such outstanding certificate shall, after the Effective Time, be
entitled to vote the shares of Global One Common Stock into which such shares of
OSP Common Stock or KRSI Common Stock shall have been converted on any matters
on which the holders of record of Global One Common Stock, as of any date
subsequent to the Effective Time, shall be entitled to vote. In any matters
relating to such certificates, Global One may rely conclusively upon the records
of shareholders maintained by OSP and KRSI containing the names and addresses of
the holders of record of OSP Common Stock or KRSI Common Stock, as appropriate,
at the Effective Time.
3.3 EXCHANGE OF CERTIFICATES.
(a) EXCHANGE OF SHARES. At the Closing, Global One shall deliver to the
Exchange Agent the number of shares of Global One Common Stock to which the
holders of the OSP Shares and KRSI Shares are entitled pursuant to Section
3.1 above, to be held and distributed by the Exchange Agent in accordance
with the terms of an agreement by and between Global One and the Exchange
Agent and the terms of this Agreement. As soon as possible after the
Closing, the Exchange Agent shall deliver to all the shareholders of record
of OSP and KRSI as of the Effective Time a transmittal letter in form and
substance satisfactory to Global One and the Exchange Agent. Upon receipt
from the holders of the OSP Shares and KRSI Shares of the letter of
transmittal duly executed by such holder, the certificates representing the
OSP Shares and KRSI Shares for cancellation and such other documents as may
reasonably be required by the Exchange Agent, the Exchange Agent shall
deliver to such holder one or more certificates representing the appropriate
number of shares of Global One Common Stock. The shares of Global One Common
Stock issued upon the surrender for exchange of the OSP Shares and KRSI
Shares in accordance with the terms hereof shall be deemed to have been
issued in full satisfaction of all rights pertaining to the OSP Shares and
KRSI Shares exchanged therefor.
(b) NO FRACTIONAL SHARES. No certificates or scrip representing
fractional shares of Global One Common Stock shall be issued upon the
surrender for exchange of the certificates representing the OSP Shares and
KRSI Shares, and such fractional share interests will not entitle the owner
thereof to vote or to any rights of a shareholder of OSP or KRSI.
Notwithstanding any other provision of this Agreement, each holder of OSP
Shares or KRSI Shares who would otherwise have been entitled to receive a
fraction of a share of Global One Common Stock (after taking into account
all certificates representing OSP Shares or KRSI Shares delivered by such
holder) shall receive, in lieu thereof, one additional share of Global One
Common Stock.
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ARTICLE IV -- THE OFFERING
Subsequent to March 27, 1996, the date as of which the Original Agreement
was executed, Global One, with the assistance of OSP and KRSI, commenced the
Offering. Global One retained the services of Miller, Johnson & Kuehn,
Incorporated ("MJK") and Cruttenden Roth Incorporated ("CR") as placement agents
and entered into agreements with such firms with respect to the Offering. A copy
of the agreement entered into with MJK (the "MJK Agreement") is attached hereto
as Exhibit 4.1. The agreement with CR has not been reduced to writing but is
anticipated to be substantially similar to the MJK Agreement except with respect
to the referral fees. The parties hereto each consent to Global One entering
into such agreements and the payment of all fees, expenses and commissions set
forth therein. In the Offering, subscriptions for 4,504,234 Global One Shares or
$6,756,351 have been received and accepted by Global One. The Offering is
expected to close simultaneously with the Closing.
ARTICLE V -- REPRESENTATIONS AND WARRANTIES OF GLOBAL ONE,
OSP AND THE OSP SHAREHOLDERS
Except as set forth in and qualified by the schedules attached hereto,
Global One and OSP, jointly and severally, hereby make the following
representations and warranties to KRSI, and except as set forth in and qualified
by the schedules attached hereto, the OSP Shareholders, jointly and severally,
hereby make the representations and warranties set forth in Sections 5.1, 5.3,
5.6, 5.9, 5.10, 5.17 and 5.18 below to KRSI.
5.1 CORPORATE EXISTENCE AND POWER. As of the date hereof, OSP is a
corporation duly incorporated, validly existing and in good standing under the
laws of the State of California, Global One is a corporation duly incorporated,
validly existing and in good standing under the laws of the State of Delaware,
and BEx is a corporation duly incorporated, validly existing and in good
standing under the laws of the State of Michigan. OSP, Global One and BEx each
have all corporate powers required to carry on their respective businesses as
now conducted. OSP, Global One and BEx are each duly qualified to do business as
foreign corporations and are in good standing in each jurisdiction where the
character of their respective properties owned or leased by them or the nature
of their respective activities makes such qualification necessary, except for
those jurisdictions where the failure to be so qualified would not have a
Material Adverse Effect on OSP or Global One. The copies of the articles of
incorporation and by-laws of OSP which have been delivered to KRSI by OSP are as
of the date hereof true and complete copies of the articles of incorporation and
by-laws of OSP. The certificate of incorporation attached hereto as Exhibit
2.5(a)-1 is as of the date hereof, and will be as of the Effective Time, the
certificate of incorporation of Global One, and the by-laws attached hereto as
Exhibit 2.5(b)-1, is as of the date hereof, and will be as of the Effective
Time, the by-laws of Global One.
5.2 OSP AND GLOBAL ONE SUBSIDIARIES. Schedule 5.2 hereto lists each
subsidiary of OSP and Global One, together with its jurisdiction of
incorporation or organization. All the outstanding shares of capital stock of
each such subsidiary have been validly issued and are fully paid and
nonassessable and, except as set forth on Schedule 5.2 hereto, owned by OSP or
Global One, as appropriate, free and clear of any Liens. Except for the capital
stock of their subsidiaries, neither OSP nor Global One owns, directly or
indirectly, any capital stock or other ownership interest in any corporation,
partnership, joint venture or other entity. Immediately prior to the BEx Merger,
OSP will own all of the oustanding shares of capital stock of BEx.
5.3 CORPORATE AUTHORIZATIONS.
(a) The execution, delivery and performance by OSP and BEx of this
Agreement and the consummation by OSP and BEx of the transactions
contemplated hereby are within their respective corporate powers and have
been duly authorized by all necessary corporate action on the part of OSP
and BEx, including without limitation approval of the OSP Shareholders. This
Agreement
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has been duly and validly executed and delivered by OSP, BEx and the OSP
Shareholders and constitutes a valid and binding agreement of OSP, BEx and
the OSP Shareholders enforceable in accordance with its terms.
(b) The execution, delivery and performance by Global One and the
Acquisition Companies of this Agreement and the consummation by Global One
and the Acquisition Companies of the transactions contemplated hereby are
within their corporate powers and have been duly authorized by all necessary
corporate action on the part of Global One and the Acquisition Companies.
This Agreement has been duly and validly executed and delivered by Global
One and the Acquisition Companies and constitutes a valid and binding
agreement of Global One and the Acquisition Companies enforceable in
accordance with its terms.
5.4 GOVERNMENTAL AUTHORIZATION. The execution, delivery and performance by
Global One, OSP, BEx, the Acquisition Companies and the OSP Shareholders of this
Agreement and the consummation of the OSP Merger and the BEx Merger require no
action by or in respect of, or filing with, any Governmental Entity other than
(a) the filing of the OSP Certificates of Merger in accordance with the CGCL and
DGCL, (b) the filing of the BEx Certificates of Merger in accordance with the
MIBCA and DGCL, (c) compliance with any applicable requirements of the
Securities Act, (d) compliance with any applicable requirements of the Exchange
Act, (e) compliance with the rules or regulations of NASDAQ, (f) compliance with
the securities laws of various states and (g) any action or filing which the
failure to obtain or make would not, individually or in the aggregate, have a
Material Adverse Effect on any party hereto.
5.5 NON-CONTRAVENTION. The execution, delivery and performance by Global
One, OSP, BEx, the Acquisition Companies and the OSP Shareholders of this
Agreement does not, and the consummation by Global One, OSP, BEx, the
Acquisition Companies and the OSP Shareholders of the transactions contemplated
hereby will not, (a) contravene or conflict with the articles of incorporation
or by-laws of OSP or BEx or the certificates of incorporation or by-laws of
Global One or any of the Acquisition Companies, (b) assuming compliance with the
matters referred to in Section 5.4 above, contravene or conflict with or
constitute a violation of any provision of any law, regulation, judgment,
injunction, order or decree binding upon or applicable to Global One, OSP, any
of their respective subsidiaries or the OSP Shareholders, other than such
contravention, conflicts or violations which would not, individually or in the
aggregate, have a Material Adverse Effect on any party hereto, (c) assuming that
the consents listed on Schedule 5.5 hereto are obtained prior to the Effective
Time, constitute a breach or violation of, or a default under or give rise to a
right of termination, cancellation or acceleration of any right or obligation of
Global One, OSP or any of their respective subsidiaries or to a loss of any
benefit to which Global One, OSP or any of their respective subsidiaries is
entitled under any provision of, any agreement, contract or other instrument
binding upon Global One, OSP or any of their respective subsidiaries or any
license, franchise, permit or other similar authorization held by Global One,
OSP or any of their respective subsidiaries, other than such breaches,
violations, defaults, rights or losses which would not, individually or in the
aggregate, have a Material Adverse Effect on Global One or OSP, or (d) result in
the creation or imposition of any Lien on any asset of Global One, OSP or any of
their respective subsidiaries, other than any such creation or imposition which
would not, individually or in the aggregate, have a Material Adverse Effect on
Global One or OSP. Schedule 5.5 hereto sets forth a true, complete and correct
list of all consents, approvals and authorizations required to be obtained by
Global One, OSP and their respective subsidiaries from any third party (other
than as otherwise expressly contemplated by Section 5.4 of this Agreement) in
connection with this Agreement, the OSP Merger, the BEx Merger and the
transactions contemplated hereby where the failure of Global One or OSP or any
of their respective subsidiaries to obtain such consent, approval or
authorization, individually or in the aggregate, would have a Material Adverse
Effect on any party hereto.
5.6 CAPITALIZATION.
(a) As of the date hereof, (i) the authorized capital stock of OSP
consists of 30,000,000 shares of Common Stock, and (ii) there are
outstanding 1,636 shares of OSP Common Stock and a
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warrant to purchase up to 50 shares of OSP Common Stock. All outstanding
shares of OSP Common Stock are duly authorized, validly issued, fully paid
and nonassessable, and issued in compliance with all applicable federal and
state securities laws. Except as set forth in this Section 5.6(a), there are
outstanding (a) no shares of OSP Common Stock or other voting securities of
OSP, (b) no securities of OSP convertible into or exchangeable for shares of
OSP Common Stock or voting securities of OSP and (c) no options, warrants or
other rights to acquire from OSP, and no obligation of OSP to issue, any
capital stock, voting securities or securities convertible into or
exchangeable for capital stock or voting securities of OSP. There are no
outstanding obligations of OSP to repurchase, redeem or otherwise acquire
any OSP Common Stock. As of the date hereof, all of the shares of OSP Common
Stock are owned by the OSP Shareholders free and clear from all Liens.
Immediately prior to the Effective Time, all of the shares of OSP Common
Stock will be owned by the OSP Shareholders free and clear of all Liens,
except to the extent that the warrant to purchase up to 50 shares of OSP
Common Stock referred to in this Section 5.6(a) has been exercised between
the date hereof and the Effective Time.
(b) As of the date hereof, (i) the authorized capital stock of Global
One consists of 30,000,000 shares of Common Stock and 20,000,000 shares of
Preferred Stock, (ii) there are outstanding two (2) shares of Global One
Common Stock. All outstanding shares of Global One are, and all shares of
Global One Common Stock which may be issued pursuant to the Reorganization
will be, when issued in accordance with the terms hereof, duly authorized,
validly issued, fully paid and nonassessable, and issued in compliance with
all applicable federal and state securities laws. Except as set forth in
this Section 5.6(b), there are outstanding (a) no shares of Global One
Common Stock or other voting securities of Global One, (b) no securities of
Global One convertible into or exchangeable for shares of Global One Common
Stock or voting securities of Global One and (c) no options, warrants or
other rights to acquire from Global One, and no obligation of Global One to
issue, any capital stock, voting securities or securities convertible into
or exchangeable for capital stock or voting securities of Global One. There
are no outstanding obligations of Global One to repurchase, redeem or
otherwise acquire any Global One Common Stock.
5.7 FINANCIAL STATEMENTS.
(a) OSP has furnished KRSI true and complete copies of its consolidated
balance sheets, statements of operations, statements of changes in
shareholders' equity and statements of cash flows together with the report
thereon by Deloitte & Touche LLP, OSP's independent auditors, for its fiscal
years ended December 31, 1993, December 31, 1994 and December 31, 1995. The
OSP Financial Statements have been, and any OSP Financial Statements
delivered to KRSI for subsequent periods will be, prepared in conformance
with generally accepted accounting principles applied on a basis consistent
with prior periods, and fairly present and will fairly present in all
material respects the financial condition of OSP and its subsidiaries as of
the represented dates thereof and the results of OSP's and its subsidiaries'
operations for the periods covered thereby.
(b) Global One, OSP Acquisition, KRSI Acquisition and BEx Acquisition
(i) have been organized solely for the purposes of effecting the
Reorganization and the transactions contemplated by this Agreement, (ii)
have not conducted any business and will not, prior to the Effective Time,
conduct any business other than incident to their formation, the execution
and delivery of this Agreement and the Original Agreement, the Offering and
the other transactions contemplated by this Agreement, and (iii) have no,
and prior to the Closing will have no, assets, liabilities or obligations of
any nature other than those incident to their formation and pursuant to this
Agreement, the Original Agreement, the Offering and the other transactions
contemplated by this Agreement.
5.8 BOOKS AND RECORDS. The books of account and records (including
customer order files, employment records, licensing records, employment records
and production and manufacturing records) of Global One, OSP and their
respective subsidiaries are complete, true and correct in all material respects.
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5.9 CONTRACTS WITH RELATED PARTIES. Except as disclosed on Schedule 5.9
hereto, there are no material agreements or contracts by, between or among
Global One, OSP or any of their respective subsidiaries, on the one hand, and
any officers, directors or shareholders of Global One, OSP or any of their
respective subsidiaries, on the other hand.
5.10 ABSENCE OF CERTAIN CHANGES OR EVENTS. Except as expressly
contemplated by this Agreement, since December 31, 1995, OSP and each of its
subsidiaries has conducted its business only in the ordinary course, and there
has not been:
(a) any event, occurrence or development of a state of circumstances or
facts which has had a Material Adverse Effect on OSP or any of its
subsidiaries;
(b) any declaration, setting aside or payment of any dividend or other
distribution with respect to any shares of OSP Common Stock, or any
repurchase, redemption or other acquisition by OSP of any outstanding shares
of OSP Common Stock or other securities of, or other ownership interests in,
OSP, except as described in Schedule 5.10(b) hereto;
(c) any split, combination or reclassification of any OSP Common Stock
or any issuance or the authorization of any issuance of any other securities
in respect of, in lieu of, or in substitution for shares of OSP Common
Stock;
(d) any incurrence, assumption or guarantee by OSP or any of its
subsidiaries of any indebtedness for borrowed money other than in the
ordinary course of business and in amounts and on terms consistent with past
practices (including any such borrowings under its existing bank credit
facility) except as described in Schedule 5.10(d) hereto;
(e) any damage, destruction or other casualty loss (whether or not
covered by insurance) affecting the business assets of OSP or any of its
subsidiaries which, individually or in the aggregate, has had or would
reasonably be expected to have a Material Adverse Effect on OSP or any such
subsidiary;
(f) any change in any method of accounting or accounting practice by OSP
or any of its subsidiaries, except for any such change required by reason of
a concurrent change in generally accepted accounting principles; or
(g) (i) any grant, except pursuant to agreements in effect on the date
of this Agreement and disclosed in Schedule 5.10(g) hereto, of any material
severance or termination pay to any director, officer or employee of OSP or
any of its subsidiaries, (ii) the entering into of any material employment,
deferred compensation or other similar agreement (or any amendment to any
such existing agreement) with any director, officer or employee of OSP or
any of its subsidiaries, except as contemplated in Section 8.11 hereto,
(iii) any material increase in benefits payable under any existing severance
or termination pay policies or employment agreements or (iv) other than in
the ordinary course of business consistent with past practices, any material
increase in compensation, bonus or other benefits payable to directors,
officers or employees of OSP or any of its subsidiaries.
5.11 LITIGATION. Except as disclosed in Schedule 5.11 hereto, there is no
action, suit, investigation or proceeding pending against or, to the knowledge
of Global One, OSP, BEx and the OSP Shareholders, threatened against or
affecting, Global One, OSP or any of their respective subsidiaries or properties
(other than any such suit, action or proceeding challenging the transactions
contemplated by this Agreement or any provision of this Agreement or seeking to
restrain or prohibit the consummation of the Mergers) that, if determined or
resolved adversely to Global One, OSP or any such subsidiary (in accordance with
the plaintiff's demands, if applicable), individually or in the aggregate, would
reasonably be expected to have a Material Adverse Effect on Global One, OSP or
any such subsidiary.
5.12 TAXES. Except as set forth in Schedule 5.12, each of the OSP
Affiliated Group has filed all material tax returns and reports required to be
filed by it and has paid (or OSP has paid on its behalf)
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all of the Taxes required to be paid by it (other than Taxes, the failure to pay
which would not, individually or in the aggregate, have a Material Adverse
Effect on OSP), and the most recent financial statements contained in the OSP
Financial Statements reflect an adequate reserve for all material Taxes payable
by OSP and its subsidiaries for all taxable periods and portions thereof through
the date of such financial statements. No deficiencies for any Taxes have been
proposed, asserted or assessed against Global One, OSP, any of their respective
subsidiaries or any member of the OSP Affiliated Group (other than deficiencies,
the liability for which would not, individually or in the aggregate, have a
Material Adverse Effect on Global One, OSP or any such subsidiary), and no
requests for waivers of the time to assess any Taxes are pending. None of the
assets or properties of Global One, OSP or any of their respective subsidiaries
is subject to any tax lien (other than liens for Taxes that are not yet due or
that are being contested in good faith by appropriate proceedings) except for
liens which would not, individually or in the aggregate, have a Material Adverse
Effect on Global One, OSP or any such subsidiary.
5.13 TITLE TO ASSETS. As of the dates of the respective balance sheets
that are part of the OSP Financial Statements, OSP and its subsidiaries owned
and will own the assets reflected therein as of such dates. As of the date
hereof and immediately prior to the time of the KRSI Merger, Global One and its
subsidiaries shall hold title to their respective assets free and clear of all
Liens, except as disclosed in Schedule 5.13 hereto.
5.14 LABOR MATTERS. Neither Global One, OSP nor any of their respective
subsidiaries is a party to any collective bargaining agreement or other labor
union contract applicable to persons employed by Global One, OSP or any of their
respective subsidiaries.
5.15 EMPLOYEE BENEFIT PLANS.
(a) There are no Global One Plans. Schedule 5.15 hereto sets forth a
list of all OSP Plans. Except for the OSP Plans, with respect to all
employees and former employees of OSP or any of its subsidiaries and all
dependents and beneficiaries of such employees and former employees, (i)
neither OSP nor any of its subsidiaries maintains or contributes to any
nonqualified deferred compensation or retirement plans, contracts or
arrangements, (ii) neither OSP nor any of its subsidiaries maintains or
contributes to any qualified defined contribution plans (as defined in
Section 3(34) of ERISA, or Section 414(i) of the Code), (iii) neither OSP
nor any of its subsidiaries maintains or contributes to any qualified
defined benefit plans (as defined in Section 3(35) of ERISA or Section
414(j) of the Code) and (iv) neither OSP nor any of its subsidiaries
maintains or contributes to any employee welfare benefit plans (as defined
in Section 3(1) of ERISA).
(b) The OSP Plans comply in all material respects with the requirements
of ERISA and the Code, except for such failures to comply which individually
or in the aggregate could not reasonably be expected to have a Material
Adverse Effect on OSP.
(c) OSP has delivered to KRSI true and complete copies of (i) all OSP
Plans, (ii) the most recent determination letter, if any, received by OSP or
any of its subsidiaries from the Internal Revenue Service regarding the OSP
Plans (iii) the most recent financial statements and annual report or return
for the OSP Plans and (iv) the most recently prepared actuarial valuation
reports for the OSP Plans, if any.
d) Neither OSP nor any of its subsidiaries contributes (and has not
ever contributed) to any multi-employer plan, as defined in Section 3(37) of
ERISA. Neither OSP nor any of its subsidiaries has any actual or potential
liabilities under Section 4201 of ERISA for any complete or partial
withdrawal from a multi-employer plan. Neither OSP nor any of its
subsidiaries has any actual or potential liability for death or medical
benefits after separation from employment, other than (i) death benefits
under the OSP Plans (whether or not subject to ERISA) and (ii) health care
continuation benefits described in Section 4980B of the Code.
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(e) Neither OSP nor any of its subsidiaries nor any of their respective
directors, officers, employees or other "fiduciaries," as such term is
defined in Section 3(21) of ERISA, has committed any breach of fiduciary
responsibility imposed by ERISA or any other applicable law with respect to
the OSP Plans which would subject OSP or any of its subsidiaries, or any of
their respective directors, officers or employees, to any liability under
ERISA or any applicable law, which liability would have a Material Adverse
Effect on OSP.
(f) Neither OSP nor any of its subsidiaries has incurred any liability
for any tax or civil penalty or any disqualification of any employee benefit
plan (as defined in Section 3(3) of ERISA) imposed by Sections 4980B and
4975 of the Code and Part 6 of Title I and Section 502(i) of ERISA, which
liability would have a Material Adverse Effect on OSP.
5.16 COMPLIANCE WITH LAWS. Except as disclosed on Schedule 5.16 hereto,
neither Global One, OSP nor any of their respective subsidiaries (a) is in
violation of, nor has it violated, any applicable provisions of any laws,
statutes, ordinances or regulations or (b) has received any notice from any
Governmental Entity or any other person that Global One, OSP or any of their
respective subsidiaries is in violation of, or has violated, any applicable
provisions of any laws, statutes, ordinances or regulations, except in the case
of clauses (a) and (b), for violations, individually or in the aggregate, which
have not had and could not reasonably be expected to have a Material Adverse
Effect on Global One, OSP or any such subsidiary. Each of Global One, OSP and
their respective subsidiaries has all permits, licenses and franchises from
Governmental Entities required to conduct its business as now being conducted,
except for such permits, licenses and franchises the absence of which would not,
individually or in the aggregate, have a Material Adverse Effect on Global One,
OSP or such subsidiaries.
5.17 BROKERS. Except as set forth in Schedules 4.1 and 5.17 hereto, no
broker, investment banker, financial advisor or other person is entitled to any
broker's, finder's, financial advisor's or other similar fee or commission in
connection with the transactions contemplated by this Agreement based upon
arrangements made by or on behalf of Global One, OSP, their respective
subsidiaries or the OSP Shareholders and not entered into pursuant to the
provisions of this Agreement. The fees and expenses of the OSP Financial Advisor
will be paid by Global One. OSP has provided KRSI with a true and correct copy
of the fee agreement among OSP, the OSP Shareholders and the OSP Financial
Advisor.
5.18 VOTES REQUIRED. The affirmative votes of a majority of the votes that
holders of the outstanding Global One Shares, OSP Shares and BEx Shares, and
holders of the outstanding shares of common stock of each of the Acquisition
Companies, are entitled to cast at meetings called for the purpose of approving
the Mergers and this Agreement are the only votes of holders of capital stock of
Global One, OSP and their respective subsidiaries that are required to approve
the Mergers, this Agreement and the transactions contemplated hereby.
5.19 ENVIRONMENTAL MATTERS. Global One, OSP and their respective
subsidiaries are in compliance with all Environmental Laws, except for any
noncompliance that, either singly or in the aggregate, would not be reasonably
likely to have a Material Adverse Effect on Global One, OSP or their respective
subsidiaries. Global One and OSP have previously furnished to KRSI a true and
correct list of all Hazardous Materials, if any, generated, used, handled or
stored by Global One, OSP or any of their respective subsidiaries, the proper
disposal of which would require a material expenditure by Global One, OSP or any
of their respective subsidiaries. Global One and OSP have previously made
available to KRSI copies of all documents, if any, concerning any environmental
or health and safety matter adversely affecting Global One, OSP or any of their
respective subsidiaries and copies of any environmental audits or risk
assessments, site assessments, documentation regarding off-site disposal of
Hazardous Materials, spill control plans and material correspondence with any
Governmental Entity regarding the foregoing.
5.20 TRADEMARKS, PATENTS AND COPYRIGHTS. Global One, OSP and their
respective subsidiaries own, or possess adequate licenses or other valid rights
to use, all patents, patent rights, trademarks,
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trademark rights, trade names, trade name rights, copyrights, service marks,
service mark rights, trade secrets, applications to register and registrations
for, the foregoing patents, trademarks, service marks, know-how and other
proprietary rights and information used in connection with the business of
Global One, OSP and their respective subsidiaries as currently conducted, and no
assertion or claim has been made in writing challenging the validity of any of
such rights. The conduct of the business of Global One, OSP and their respective
subsidiaries as currently conducted does not conflict in any way with any
patent, patent rights, license, trademark, trademark right, trade name, trade
name right, service mark, copyright or other proprietary right of any other
person, neither Global One, OSP nor any of their respective subsidiaries has
received a claim or threat that any such conflict exists, and no litigation,
claim, suit, action, proceeding, or complaint concerning the foregoing has been
filed or is ongoing. Except as set forth in Schedule 5.20 hereto, Global One,
OSP and their respective subsidiaries have the unencumbered right to sell their
products and services (whether now offered for sale or under development) free
from any royalty or other obligations to any third parties.
5.21 CONTRACTS AND OTHER AGREEMENTS. All contracts and agreements listed
on Schedule 5.21 hereto are valid, existing, in full force and effect, and
binding upon Global One, OSP or their respective subsidiaries, as the case may
be, and to the best knowledge of Global One, OSP and BEx, binding upon the other
parties thereto in accordance with their terms, and Global One, OSP and their
respective subsidiaries have paid in full or accrued all amounts now due from
them thereunder and have satisfied in full or provided for all of their
liabilities and obligations thereunder which are presently required to be
satisfied or provided for, and are not in default under any of them, nor, to the
best knowledge of Global One, OSP, BEx and the OSP Shareholders, is any other
party to any such contract or other agreement in default thereunder, nor does
any condition exist that with notice or lapse of time or both would constitute a
default thereunder. Schedule 5.21 hereto sets forth a list of the following
contracts and other agreements to which Global One, OSP or any of their
respective subsidiaries is a party or by or to which they or their assets or
properties are bound or subject:
(a) any agreement that individually requires aggregate expenditures by
Global One, OSP or any of their respective subsidiaries in any one year of
more than $50,000;
(b) any indenture, trust agreement, loan agreement or note that involves
or evidences outstanding indebtedness, obligations or liabilities for
borrowed money in excess of $50,000;
(c) any lease, sublease, installment purchase or similar arrangement for
the purchase, use or occupancy of real or personal property (i) that
individually requires aggregate expenditures by Global One, OSP or any of
their respective subsidiaries in any one year of more than $50,000, or (ii)
pursuant to which Global One, OSP or any of their respective subsidiaries is
the lessor of any real property which has rentals over $50,000 per year,
together with the date of termination of such leases, the name of the other
party and the annual rental payments required to be made under such leases;
(d) any agreement of surety, guarantee or indemnification, other than
(i) an agreement in the ordinary course of business with respect to
obligations in an amount not in excess of $50,000, or (ii) indemnification
provisions contained in leases not otherwise required to be disclosed;
(e) any agreement, including without limitation employment agreements
and bonus plans, relating to the compensation of, or obligating Global One,
OSP or any of their respective subsidiaries to make payments (whether such
payments are fixed in amount or contingent) to, (i) officers, (ii)
employees, (iii) former employees, (iv) consultants, (v) advisors or (vi)
any person who was promised such payments;
(f) any agreement containing covenants of Global One, OSP or any of
their respective subsidiaries not to compete in any line of business, in any
geographic area or with any person or covenants of any other person not to
compete with Global One, OSP or any of their respective subsidiaries in any
line of business of Global One, OSP or any of their respective subsidiaries.
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(g) any agreement granting or restricting the right of Global One, OSP
or any of their respective subsidiaries to use a trade name, trade mark or
logo;
(h) any agreement with any customer or supplier that cannot be
terminated without penalty in excess of $10,000 by Global One, OSP or any of
their respective subsidiaries within 90 days; and
(i) any franchise, licensing or development agreement.
True and complete copies of all of the contracts and other agreements set
forth in Schedule 5.21 hereto (or required to be set forth therein) have been
previously provided to KRSI.
5.22 INSURANCE. Schedule 5.22 attached hereto contains a complete listing
of all policies of insurance maintained by Global One, OSP and their respective
subsidiaries as of the date hereof and at all times during the 24-month period
ending on the date hereof. All such policies of insurance are in full force and
effect, and true and correct copies of all such policies of insurance have been
previously provided to KRSI.
5.23 DISCLOSURE. To the best knowledge of Global One, OSP, BEx and the OSP
Shareholders, all material facts relating to the business, operations,
properties, assets, liabilities (contingent or otherwise), and financial
condition of Global One, OSP and their respective subsidiaries have been
disclosed to KRSI in or in connection with this Agreement. The representations,
warranties and statements made by Global One, OSP, BEx and the OSP Shareholders
in this Agreement and in the certificates delivered pursuant hereto do not
contain any untrue statement of a material fact, and, when taken together, do
not omit to state any material fact necessary to make such representations,
warranties and statements, in light of the circumstances under which they are
made, not misleading.
ARTICLE VI - REPRESENTATIONS AND WARRANTIES OF KRSI
KRSI represents and warrants to Global One, OSP, BEx and the OSP
Shareholders that, except as set forth in and qualified by the schedules
attached hereto:
6.1 CORPORATE EXISTENCE AND POWER. KRSI is a corporation duly
incorporated, validly existing and in good standing under the laws of the State
of Minnesota, and has all corporate powers required to carry on its business as
now conducted. KRSI is duly qualified to do business as a foreign corporation
and is in good standing in each jurisdiction where the character of the property
owned or leased by it or the nature of its activities makes such qualification
necessary, except for those jurisdictions where the failure to be so qualified
would not have a Material Adverse Effect on KRSI. The copies of the articles of
incorporation and by-laws of KRSI which have been delivered to OSP by KRSI are
true and complete copies of the articles of incorporation and by-laws of KRSI.
6.2 KRSI SUBSIDIARIES. KRSI has no subsidiaries. KRSI does not own,
directly or indirectly, any capital stock or other ownership interest in any
corporation, partnership, joint venture or other entity.
6.3 CORPORATE AUTHORIZATION. Subject to obtaining the approval of the
shareholders of KRSI at the Shareholders' Meeting, the execution, delivery and
performance by KRSI of this Agreement and the consummation by KRSI of the
transactions contemplated hereby to be consummated by it are within its
corporate powers and have been duly authorized by all necessary corporate action
on the part of KRSI. This Agreement has been duly and validly executed and
delivered by KRSI and constitutes a valid and binding agreement of KRSI
enforceable in accordance with its terms.
6.4 GOVERNMENTAL AUTHORIZATION. The execution, delivery and performance by
KRSI of this Agreement and the consummation by KRSI of the transactions
contemplated hereby to be consummated by them require no action by or in respect
of, or filing with, any Governmental Entity other than (a) the filing of the
KRSI Certificates of Merger in accordance with the MNBCA and DGCL, (b)
compliance with any applicable requirements of the Securities Act, (c)
compliance with any applicable requirements of the Exchange Act, (d) compliance
with the rules or regulations of
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NASDAQ, (e) compliance with the securities laws of various states and (f) any
action or filing which the failure to obtain or make would not, individually or
in the aggregate, have a Material Adverse Effect on any party hereto.
6.5 NON-CONTRAVENTION. The execution, delivery and performance by KRSI of
this Agreement does not, and the consummation by KRSI of the transactions
contemplated hereby will not, (a) contravene or conflict with the articles of
incorporation or by-laws of KRSI, (b) assuming compli-
ance with the matters referred to in Section 6.4 above, contravene or conflict
with or constitute a violation of any provision of any law, regulation,
judgment, injunction, order or decree binding upon or applicable to KRSI other
than such contraventions, conflicts or violations which would not, individually
or in the aggregate, have a Material Adverse Effect on any party hereto, (c)
assuming that the consents listed on Schedule 6.5 hereto are obtained prior to
the Effective Time, constitute a breach or violation of, or a default under or
give rise to a right of termination, cancellation or acceleration of any right
or obligation of KRSI or to a loss of any benefit to which KRSI is entitled
under any provision of, any agreement, contract or other instrument binding upon
KRSI or any license, franchise, permit or other similar authorization held by
KRSI, other than such breaches, violations, defaults, rights or losses which
would not, individually or in the aggregate, have a Material Adverse Effect on
KRSI, or (d) result in the creation or imposition of any Lien on any asset of
KRSI, other than any such creation or imposition which would not, individually
or in the aggregate, have a Material Adverse Effect on KRSI. Schedule 6.5 sets
forth a true, complete and correct list of all consents, approvals and
authorizations required to be obtained by KRSI from any third party (other than
as otherwise expressly contemplated by Section 6.4 of this Agreement) in
connection with this Agreement, the Reorganization and the transactions
contemplated hereby where the failure of KRSI to obtain such consent, approval
or authorization, individually or in the aggregate, would have a Material
Adverse Effect on KRSI.
6.6 CAPITALIZATION. The authorized capital stock of KRSI consists of
10,000,000 shares of KRSI Common Stock. As of the date of this Agreement, there
are outstanding 4,082,373 shares of KRSI Common Stock. As of the date of this
Agreement, KRSI has reserved 1,207,939 shares of KRSI Common Stock for issuance
to upon exercise of outstanding employee and director stock options and
outstanding warrants to purchase shares of KRSI Common Stock. All outstanding
shares of KRSI Common Stock are duly authorized, validly issued, fully paid and
nonassessable and issued in compliance with all applicable federal and state
securities laws. The KRSI Common Stock is registered pursuant to Section 12(g)
of the Exchange Act. Except as set forth in this Section or on Schedule 6.6
attached hereto and except for changes since the date hereof resulting from the
exercise, cancellation or exchange of currently outstanding options and warrants
listed on Schedule 6.6 hereto, there are outstanding (a) no shares of KRSI
Common Stock or other voting securities of KRSI, (b) no securities of KRSI
convertible into or exchangeable for shares of capital stock or voting
securities of KRSI and (c) no options or other rights to acquire from KRSI, and
no obligation of KRSI to issue, any capital stock, voting securities or
securities convertible into or exchangeable for capital stock or voting
securities of KRSI. There are no outstanding obligations of KRSI to repurchase,
redeem or otherwise acquire any KRSI Common Stock.
6.7 SEC DOCUMENTS. KRSI has filed all KRSI SEC Documents and has
previously provided to OSP copies of all SEC comment letters received in
connection therewith. As of their respective dates, the KRSI SEC Documents
complied as to form in all material respects with the requirements of the
Securities Act, or the Exchange Act, as the case may be, and the rules and
regulations of the SEC promulgated thereunder applicable to such KRSI SEC
Documents, and none of the KRSI SEC Documents contained any untrue statement of
a material fact or omitted to state a material fact required to be stated
therein or necessary in order to make the statements therein, in light of the
circumstances under which they were made, not misleading. Except to the extent
that information contained in any KRSI SEC Document has been revised or
superseded by a later-filed KRSI SEC Document, filed and publicly available
prior to the date of this Agreement, as of the date of this Agreement, none of
the KRSI SEC Documents contains any untrue statement of a material fact or
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omits to state any material fact required to be stated therein or necessary in
order to make the statements therein, in light of the circumstances under which
they were made, not misleading. The financial statements of KRSI included in the
KRSI SEC Documents complied as of their respective dates of filing with the SEC
as to form in all material respects with applicable accounting requirements and
the published rules and regulations of the SEC with respect thereto, have been
prepared in accordance with generally accepted accounting principles (except, in
the case of unaudited statements, as permitted by the Exchange Act) applied on a
consistent basis during the periods involved (except as may be indicated in the
notes thereto) and fairly present the financial position of KRSI as of the dates
thereof and the results of their operations and cash flows for the periods then
ended (subject, in the case of unaudited statements, to normal year-end audit
adjustments). Except as to the extent that information contained in any KRSI SEC
Document has been revised or superseded by a later-filed KRSI SEC Document,
filed and publicly available prior to the date of this Agreement, and except for
liabilities and obligations incurred in the ordinary course of business
consistent with past practice, KRSI has no liabilities or obligations of any
nature (whether accrued, absolute, contingent or otherwise) required by
generally accepted accounting principles to be set forth on a balance sheet of
KRSI or in the notes thereto which, individually or in the aggregate, could
reasonably be expected to have a Material Adverse Effect on KRSI.
6.8 KRSI'S BOOKS AND RECORDS. The books of account and records (including
customer order files, employment records, licensing records, employment records
and production and manufacturing records) of KRSI are complete, true and correct
in all material respects.
6.9 KRSI CONTRACTS WITH RELATED PARTIES. Except as disclosed on Schedule
6.9 hereto or in the KRSI SEC Documents, there are no material agreements or
contracts by, between or among KRSI and any of KRSI's officers, directors or
shareholders.
6.10 ABSENCE OF CERTAIN CHANGES OR EVENTS. Except as disclosed in the KRSI
SEC Documents, and except as expressly contemplated by this Agreement, since the
date of the most recent audited financial statements included in the KRSI SEC
Documents, KRSI has conducted its business only in the ordinary course, and
there has not been:
(a) any event, occurrence or development of a state of circumstances or
facts which has had a Material Adverse Effect on KRSI;
(b) any declaration, setting aside or payment of any dividend or other
distribution with respect to any shares of KRSI Common Stock, or any
repurchase, redemption or other acquisition by KRSI of any outstanding
shares of KRSI Common Stock or other securities of, or other ownership
interests in, KRSI;
(c) any split, combination or reclassification of any of KRSI Common
Stock or any issuance or the authorization of any issuance of any other
securities in respect of, in lieu of or in substitution for shares of KRSI
Common Stock;
(d) any incurrence, assumption or guarantee by KRSI of any indebtedness
for borrowed money other than in the ordinary course of business and in
amounts and on terms consistent with past practices (including any such
borrowings under its existing bank credit facility) except as described in
Schedule 6.10(d) hereto;
(e) any damage, destruction or other casualty loss (whether or not
covered by insurance) affecting the business assets of KRSI which,
individually or in the aggregate, has had or would reasonably be expected to
have a Material Adverse Effect on KRSI;
(f) any change in any method of accounting or accounting practice by
KRSI, except for any such change required by reason of a concurrent change
in generally accepted accounting principles; or
(g) (i) any grant, except pursuant to agreements in effect on the date
of this Agreement and disclosed in a Schedule hereto, of any material
severance or termination pay to any director,
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officer or employee of KRSI, (ii) the entering into of any material
employment, deferred compensation or other similar agreement (or any
amendment to any such existing agreement) with any director, officer or
employee of KRSI, (iii) any material increase in benefits payable under any
existing severance or termination pay policies or employment agreements or
(iv) other than in the ordinary course of business consistent with past
practices, any material increase in compensation, bonus or other benefits
payable to directors, officers or employees of KRSI.
6.11 LITIGATION. Except as disclosed in the KRSI SEC Documents or Schedule
6.11 attached hereto, there is no action, suit, investigation or proceeding
pending against or, to the knowledge of KRSI, threatened against or affecting,
KRSI or any of its properties (other than any such suit, action or proceeding
challenging the transactions contemplated by this Agreement or seeking to
restrain or prohibit the consummation of any part of the Reorganization) that,
if determined or resolved adversely to KRSI (in accordance with the plaintiff's
demands, if applicable), individually or in the aggregate, would reasonably be
expected to have a Material Adverse Effect on KRSI.
6.12 TAXES. KRSI has filed all material tax returns and reports required
to be filed by it and has paid all of the Taxes required to be paid by it (other
than Taxes, the failure to pay which would not, individually or in the
aggregate, have a Material Adverse Effect on KRSI), and the most recent
financial statements contained in the KRSI SEC Documents reflect an adequate
reserve for all material Taxes payable by KRSI for all taxable periods and
portions thereof through the date of such financial statements. No deficiencies
for any Taxes have been proposed, asserted or assessed against KRSI (other than
deficiencies, the liability for which would not, individually or in the
aggregate, have a Material Adverse Effect on KRSI), and no requests for waivers
of the time to assess any Taxes are pending. None of the assets or properties of
KRSI is subject to any tax lien (other than liens for Taxes that are not yet due
or that are being contested in good faith by appropriate proceedings) except for
liens which would not, individually or in the aggregate, have a Material Adverse
Effect on KRSI.
6.13 TITLE TO ASSETS. As of the dates of the respective balance sheets
that are part of the KRSI SEC Documents, KRSI owned and will own the assets
reflected thereon as of such dates. As of the date hereof and as of the
Effective Time, KRSI shall hold title to its assets free and clear of all Liens,
except as described in Schedule 6.13 hereto.
6.14 LABOR MATTERS. KRSI is not a party to any collective bargaining
agreement or other labor union contract applicable to persons employed by KRSI.
6.15 EMPLOYEE BENEFIT PLANS.
(a) Schedule 6.15 hereto sets forth a list of all KRSI Plans. Except for
the KRSI Plans, with respect to all employees and former employees of KRSI
and all dependents and beneficiaries of such employees and former employees,
(i) KRSI does not maintain or contribute to any nonqualified deferred
compensation or retirement plans, contracts or arrangements, (ii) KRSI does
not maintain or contribute to any qualified defined contribution plans (as
defined in Section 3(34) of ERISA, or Section 414(i) of the Code), (iii)
KRSI does not maintain or contribute to any qualified defined benefit plans
(as defined in Section 3(35) of ERISA or Section 414(j) of the Code) and
(iv) KRSI does not maintain or contribute to any employee welfare benefit
plans (as defined in Section 3(1) of ERISA).
(b) The KRSI Plans comply in all material respects with the requirements
of ERISA and the Code, except for such failures to comply which individually
or in the aggregate could not reasonably be expected to have a Material
Adverse Effect on KRSI.
(c) KRSI has delivered to OSP true and complete copies of (i) all KRSI
Plans, (ii) the most recent determination letter, if any, received by KRSI
or any of its subsidiaries from the Internal Revenue Service regarding the
KRSI Plans, (iii) the most recent financial statements and annual report or
return for the KRSI Plans and (iii) the most recently prepared actuarial
valuation reports for the KRSI Plans, if any.
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(d) KRSI does not contribute (and has not ever contributed) to any
multi-employer plan, as defined in Section 3(37) of ERISA. KRSI does not
have any actual or potential liabilities under Section 4201 of ERISA for any
complete or partial withdrawal from a multi-employer plan. KRSI does not
have any actual or potential liability for death or medical benefits after
separation from employment, other than (i) death benefits under the KRSI
Plans (whether or not subject to ERISA) and (ii) health care continuation
benefits described in Section 4980B of the Code.
(e) Neither KRSI nor any of its directors, officers, employees or other
"fiduciaries", as such term is defined in Section 3(21) of ERISA, has
committed any breach of fiduciary responsibility imposed by ERISA or any
other applicable law with respect to the KRSI Plans which would subject KRSI
or KRSI Acquisition, or any of their respective directors, officers or
employees to any liability under ERISA or any applicable law, which
liability would have a Material Adverse Effect on KRSI or KRSI Acquisition.
(f) KRSI has not incurred any liability for any tax or civil penalty or
any disqualification of any employee benefit plan (as defined in Section
3(3) of ERISA) imposed by Sections 4980B and 4975 of the Code and Part 6 of
Title I and Section 502(i) of ERISA, which liability would have a Material
Adverse Effect on KRSI.
6.16 COMPLIANCE WITH LAWS. Except as disclosed in the KRSI SEC Documents
or on Schedule 6.16 hereto, KRSI (a) is not in violation of, nor has it
violated, any applicable provisions of any laws, statutes, ordinances or
regulations and (b) has not received any notice from any Governmental Entity or
any other person that KRSI is in violation of, or has violated, any applicable
provisions of any laws, statutes, ordinances or regulations, except in the case
of clauses (a) and (b), for violations, individually or in the aggregate, which
have not had and could not reasonably be expected to have a Material Adverse
Effect. KRSI has all permits, licenses and franchises from Governmental Entities
required to conduct its business as now being conducted, except for such
permits, licenses and franchises the absence of which would not, individually or
in the aggregate, have a Material Adverse Effect on KRSI.
6.17 BROKERS. Except for discounts, commissions and expenses in connection
with the Offering, no broker, investment banker, financial advisor or other
person, other than the KRSI Financial Advisor is entitled to any broker's,
finder's, financial advisor's or other similar fee or commission in connection
with the transactions contemplated by this Agreement based upon arrangements
made by or on behalf of KRSI. The fees and expenses of the KRSI Financial
Advisor will be paid by Global One. KRSI has provided OSP with a true and
correct copy of the fee agreement between KRSI and the KRSI Financial Advisor.
6.18 VOTE REQUIRED. The affirmative votes of the holders of the
outstanding KRSI Shares and outstanding shares of common stock of KRSI
Acquisition to be described in the Proxy Statement are the only votes of holders
of capital stock of KRSI and KRSI Acquisition required to approve the KRSI
Merger, this Agreement and the transactions contemplated hereby.
6.19 ENVIRONMENTAL MATTERS. KRSI is in compliance with all Environmental
Laws, except for any noncompliance that, either singly or in the aggregate,
would not be reasonably likely to have a Material Adverse Effect on KRSI. KRSI
has previously furnished to OSP a true and correct list of all Hazardous
Materials generated, used, handled or stored by KRSI, the proper disposal of
which will require any material expenditure by KRSI. KRSI has previously made
available to OSP copies of all documents concerning any environmental or health
and safety matter adversely affecting KRSI and copies of any environmental
audits or risk assessments, site assessments, documentation regarding off-site
disposal of Hazardous Materials, spill control plans and material correspondence
with any Governmental Entity regarding the foregoing.
6.20 TRADEMARKS, PATENTS AND COPYRIGHTS. KRSI owns, or possesses adequate
licenses or other valid rights to use, all patents, patent rights, trademarks,
trademark rights, trade names, trade name rights, copyrights, service marks,
service mark rights, trade secrets, applications to register and
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registrations for, the foregoing patents, trademarks, service marks, know-how
and other proprietary rights and information used in connection with the
business of KRSI as currently conducted, and no assertion or claim has been made
in writing challenging the validity of any of such rights. The conduct of the
business of KRSI as currently conducted does not conflict in any way with any
patent, patent rights, license, trademark, trademark right, trade name, trade
name right, service mark, copyright or other proprietary right of any other
person, KRSI has received no claim or threat that any such conflict exists, and
no litigation, claim, suit, action, proceeding, or complaint concerning the
foregoing has been filed or is ongoing. Except as set forth in Schedule 6.20
hereto, KRSI has the unencumbered right to sell its products and services
(whether now offered for sale or under development) free from any royalty or
other obligations to any third parties.
6.21 CONTRACTS AND OTHER AGREEMENTS. All contracts and agreements listed
on Schedule 6.21 hereto are valid, existing, in full force and effect, binding
upon KRSI and to the best knowledge of KRSI, binding upon the other parties
thereto in accordance with their terms, and KRSI has paid in full or accrued all
amounts now due from them thereunder and have satisfied in full or provided for
all of its liabilities and obligations thereunder which are presently required
to be satisfied or provided for, and is not in default under any of them, nor,
to the best knowledge of KRSI, is any other party to any such contract or other
agreement in default thereunder, nor does any condition exist that with notice
or lapse of time or both would constitute a default thereunder. Schedule 6.21
hereto sets forth a list of the following contracts and other agreements to
which KRSI is a party or by or to which it or its assets or properties are bound
or subject:
(a) any agreement that individually requires aggregate expenditures by
KRSI in any one year of more than $50,000;
(b) any indenture, trust agreement, loan agreement or note that involves
or evidences outstanding indebtedness, obligations or liabilities for
borrowed money in excess of $50,000;
(c) any lease, sublease, installment purchase or similar arrangement for
the purchase, use or occupancy of real or personal property (i) that
individually requires aggregate expenditures by KRSI in any one year of more
than $50,000, or (ii) pursuant to which KRSI is the lessor of any real
property which has rentals over $50,000 per year, together with the date of
termination of such leases, the name of the other party and the annual
rental payments required to be made under such leases;
(d) any agreement of surety, guarantee or indemnification, other than
(i) an agreement in the ordinary course of business with respect to
obligations in an amount not in excess of $50,000, or (ii) indemnification
provisions contained in leases not otherwise required to be disclosed;
(e) any agreement, including without limitation employment agreements
and bonus plans, relating to the compensation of, or obligating KRSI to make
payments (whether such payments are fixed in amount or contingent) to, (i)
officers, (ii) employees, (iii) former employees, (iv) consultants, (v)
advisors or (vi) any person who was promised such payments;
(f) any agreement containing covenants of KRSI not to compete in any
line of business, in any geographic area or with any person or covenants of
any other person not to compete with KRSI in any line of business of KRSI.
(g) any agreement granting or restricting the right of KRSI to use a
trade name, trade mark or logo;
(h) any agreement with any customer or supplier that cannot be
terminated without penalty in excess of $10,000 by KRSI within ninety days;
and
(i) any franchise, licensing or development agreement.
True and complete copies of all of the contracts and other agreements set forth
in Schedule 6.21 hereto (or required to be set forth therein) have been
previously provided to OSP.
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6.22 INSURANCE. Schedule 6.22 attached hereto contains a complete listing
of all policies of insurance maintained by KRSI as of the date hereof and at all
times during the twenty-four month period ending on the date hereof. All such
policies of insurance are in full force and effect, and true and correct copies
of all such policies of insurance have been previously provided to OSP.
6.23 DISCLOSURE. To the best knowledge of KRSI, all material facts
relating to the business, operations, properties, assets, liabilities
(contingent or otherwise), and financial condition of KRSI and its subsidiaries
have been disclosed to OSP in or in connection with this Agreement. The
representations, warranties and statements made by KRSI in this Agreement and in
the certificates delivered pursuant hereto do not contain any untrue statement
of a material fact, and, when taken together, do not omit to state any material
fact necessary to make such representations, warranties and statements, in light
of the circumstances under which they are made, not misleading.
ARTICLE VII --COVENANTS RELATING TO CONDUCT OF BUSINESS
7.1 CONDUCT OF BUSINESS BY GLOBAL ONE AND OSP. Except as contemplated by
this Agreement and except for an agreement dated May 10, 1996 entered into
between OSP and Tamarix Capital Corporation and an agreement dated May 10, 1996
entered into between OSP and Mark D. Hauser, or as described in Schedule 7.1
attached hereto, from the date hereof until the Effective Time, Global One, OSP
and their respective subsidiaries shall conduct their respective businesses in
the ordinary course consistent with past practice and shall use their best
efforts to preserve intact their business organizations and relationships with
third parties and to keep available the services of their present officers and
employees. Without limiting the generality of the foregoing, except as provided
in this Agreement or Schedule 7.1, from the date hereof until the Effective
Time, neither Global One, OSP nor any of their respective subsidiaries will, and
the OSP Shareholders will not permit Global One, OSP or their respective
subsidiaries to, without the prior written approval of KRSI:
(a) amend the certificates of incorporation or by-laws of Global One or
the Acquisition Companies, or the articles of incorporation or by-laws of
OSP or BEx;
(b) declare, set aside or pay any dividends on, or make any other
distributions (whether in cash, stock or property) in respect of, any
capital stock of Global One, OSP or any of their subsidiaries, except for
distributions required for the payment of Angard's and Malm's respective tax
liabilities for the year ended December 31, 1995 and for the period from
January 1, 1996 through the Closing computed in a manner consistent with
past practices;
(c) acquire or agree to acquire (i) by merging or consolidating with, or
by purchasing a substantial portion of the assets of, or by any other
manner, any portion of the assets of, or by any other manner, any business
or any corporation, partnership, joint venture, association or other
business organization or division thereof except in the ordinary course of
business consistent with past practice or (ii) any assets that are material,
individually or in the aggregate, to Global One, OSP or BEx, except
purchases of inventory in the ordinary course of business consistent with
past practice;
(d) sell, lease, license, mortgage or otherwise encumber or subject to
any Lien or otherwise dispose of any of its properties or assets, except in
the ordinary course of business consistent with past practice. As has been
previously disclosed to KRSI, discussions are ongoing with Stanley DeSantis
regarding the ownership of Stanley DeSantis Inc. Common Stock. If and to the
extent that OSP proposes to enter into an agreement that would result in any
change in the ownership of Stanley DeSantis Inc. Common Stock prior to the
Effective Time, OSP will so advise KRSI. Any such agreement will not be
entered into without KRSI's prior written consent, which shall not be
unreasonably withheld;
(e) (i) incur any indebtedness for borrowed money or guarantee any such
indebtedness of another person, issue or sell any debt securities or
warrants or other rights to acquire any debt securities of Global One, OSP
or any of their respective subsidiaries, or any of their respective
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securities, guarantee any debt securities of another person, enter into any
"keep well" or other agreement to maintain any financial statement condition
of another person or enter into any arrangement having the economic effect
of any of the foregoing, except for short-term borrowings incurred in the
ordinary course of business consistent with past practice, or (ii) make any
loans, advances or capital contributions to, or investments in, any other
person, other than (A) Global One, OSP or BEx, or (B) advances to employees
in accordance with past practice;
(f) make or agree to make any new capital expenditure or expenditures
which, individually, is in excess of $50,000 or, in the aggregate, are in
excess of $100,000;
(g) make any material tax election or settle or compromise any material
tax liability;
(h) pay, discharge, settle or satisfy any claims, liabilities or
obligations (absolute, accrued, asserted or unasserted, contingent or
otherwise), other than the payment, discharge, settlement or satisfaction,
in the ordinary course of business consistent with past practice or in
accordance with their terms, of liabilities reflected or reserved against
in, or contemplated by, the most recent OSP Financial Statements or incurred
in the ordinary course of business consistent with past practice, or waive
any material benefits of, or agree to modify in any material respect, any
confidentiality, standstill or similar agreements to which Global One, OSP
or any of their respective subsidiaries is a party;
(i) except in the ordinary course of business, modify, amend or
terminate any material contract or agreement to which Global One, OSP or any
of their respective subsidiaries is a party or waive, release or assign any
material rights or claims;
(j) enter into any contracts, agreements, arrangements or
understandings relating to the distribution, sale or marketing by third
parties of any products of, or products licensed by, Global One, OSP or any
of their respective subsidiaries, except in the ordinary course of business
consistent with past practice;
(k) except as required to comply with applicable law, (i) adopt, enter
into, terminate or amend any bonus, profit sharing, thrift, compensation,
stock option, restricted stock, pension, retirement, deferred compensation
or other plan, trust arrangement or fund for the benefit or welfare of any
director, officer or current or former employee, (ii) increase in any manner
the compensation or fringe benefits of, or pay any bonus to, any director,
officer or employee (except for normal increases or bonuses in the ordinary
course of business consistent with past practice), (iii) pay any benefit not
provided for under an OSP Plan, (iv) except as permitted in clause (ii),
grant any awards under any bonus, incentive, performance or other
compensation plan or arrangement or OSP Plan (including the grant of stock
options, stock appreciation rights, stock based or stock related awards,
performance units or restricted stock, or the removal of existing
restrictions in any OSP Plans or agreement or awards made thereunder) or (v)
take any action to fund or in any other way secure the payment of
compensation or benefits under any employee plan, agreement, contract or
arrangement or OSP Plan;
(l) make any change in any method of accounting or accounting practice
or policy other than those required by generally accepted accounting
principles; or
(m) authorize any of, or commit or agree to take any of, the foregoing
actions.
7.2 CONDUCT OF BUSINESS BY KRSI. Except as contemplated by this Agreement
or as described in Schedule 7.2 attached hereto, from the date hereof until the
Effective Time, KRSI shall conduct its business in the ordinary course
consistent with past practice and shall use its best efforts to preserve intact
its business organizations and relationships with third parties and to keep
available the services of its present officers and employees. Without limiting
the generality of the foregoing, except as provided in this Agreement or in
Schedule 7.2, from the date hereof until the Effective Time, KRSI will not,
without the prior written approval of Global One:
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(a) amend its articles of incorporation, by-laws or other comparable
charter or organizational documents;
(b) declare, set aside or pay any dividends on, or make any other
distributions (whether in cash, stock or property) in respect of, any KRSI
Common Stock;
(c) acquire or agree to acquire (i) by merging or consolidating with, or
by purchasing a substantial portion of the assets of, or by any other
manner, any portion of the assets of, or by any other manner, any business
or any corporation, partnership, joint venture, association or other
business organization or division thereof except in the ordinary course of
business consistent with past practice or (ii) any assets that are material,
individually or in the aggregate, to KRSI, except purchases of inventory in
the ordinary course of business consistent with past practice;
(d) sell, lease, license, mortgage or otherwise encumber or subject to
any Lien or otherwise dispose of any of its properties or assets, except in
the ordinary course of business consistent with past practice;
(e) (i) incur any indebtedness for borrowed money or guarantee any such
indebtedness of another person, issue or sell any debt securities or
warrants or other rights to acquire any debt securities of KRSI or any of
its securities, guarantee any debt securities of another person, enter into
any "keep well" or other agreement to maintain any financial statement
condition of another person or enter into any arrangement having the
economic effect of any of the foregoing, except for short-term borrowings
incurred in the ordinary course of business consistent with past practice,
or (ii) make any loans, advances or capital contributions to, or investments
in, any other person, other than (A) to KRSI or (B) advances to employees in
accordance with past practice;
(f) make or agree to make any new capital expenditure or expenditures
which, individually, is in excess of $50,000 or, in the aggregate, are in
excess of $100,000;
(g) make any material tax election or settle or compromise any material
tax liability;
(h) pay, discharge, settle or satisfy any claims, liabilities or
obligations (absolute, accrued, asserted or unasserted, contingent or
otherwise), other than the payment, discharge, settlement or satisfaction,
in the ordinary course of business consistent with past practice or in
accordance with their terms, of liabilities reflected or reserved against
in, or contemplated by, the most recent balance sheet contained in the KRSI
SEC Documents or incurred in the ordinary course of business consistent with
past practice, or waive any material benefits of, or agree to modify in any
material respect, any confidentiality, standstill or similar agreements to
which KRSI is a party;
(i) except in the ordinary course of business, modify, amend or
terminate any material contract or agreement to which KRSI or any of its
subsidiaries is a party or waive, release or assign any material rights or
claims;
(j) enter into any contracts, agreements, arrangements or
understandings relating to the distribution, sale or marketing by third
parties of KRSI's or any of its subsidiaries' products or products licensed
by KRSI except in the ordinary course of business consistent with past
practice;
(k) except as required to comply with applicable law, (i) adopt, enter
into, terminate or amend any bonus, profit sharing, thrift, compensation,
stock option, restricted stock, pension, retirement, deferred compensation
or other plan, trust arrangement or fund for the benefit or welfare of any
director, officer or current or former employee, (ii) increase in any manner
the compensation or fringe benefits of, or pay any bonus to, any director,
officer or employee (except for normal increases or bonuses in the ordinary
course of business consistent with past practice), (iii) pay any benefit not
provided for under a KRSI Plan, (iv) except as permitted in clause (ii),
grant any awards under any bonus, incentive, performance or other
compensation plan or arrangement or KRSI Plan (including the grant of stock
options, stock appreciation rights, stock based or stock related awards,
performance units or restricted stock, or the removal of existing
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restrictions in any KRSI Plans or agreement or awards made thereunder) or
(v) take any action to fund or in any other way secure the payment of
compensation or benefits under any employee plan, agreement, contract or
arrangement or KRSI Plan;
(l) make any change in any method of accounting or accounting practice
or policy other than those required by generally accepted accounting
principles; or
(m) authorize any of, or commit or agree to take any of, the foregoing
actions.
7.3 OTHER ACTION. Global One, OSP, BEx and KRSI shall not, and Global One
and OSP shall not permit any of their respective subsidiaries to, take any
action that would, or that could reasonably be expected to, result in (i) any of
the representations and warranties of such party set forth in this Agreement
that are qualified as to materiality becoming untrue, (ii) any of the
representations and warranties that are not so qualified becoming untrue in any
material respect or (iii) any of the conditions to the Mergers and consummation
of the transactions contemplated by this Agreement set forth in Article IX below
not being satisfied (subject to KRSI's right to take action specifically
permitted by Section 7.4 below).
7.4 NO SOLICITATION OF TRANSACTIONS. Global One, OSP, BEx and KRSI shall,
and shall each direct and use their respective commercially reasonable efforts
to cause their respective officers, directors, employees, agents and
representatives (including, without limitation, any investment banker, attorney
or accountant retained by it) not to initiate, solicit or knowingly encourage,
directly or indirectly (including by way of furnishing non-public information or
assistance), or take any other action to facilitate knowingly, any inquiries or
the making of any proposal that constitutes, or may reasonably be expected to
lead to, any Competing Transaction, or enter into or continue discussions or
negotiations with any person or entity in furtherance of such inquiries or to
obtain a Competing Transaction, or agree to or endorse any Competing
Transaction, or authorize any of their respective officers, directors or
employees or any investment banker, financial advisor, attorney, accountant or
other representative retained by them to take any such action, and Global One,
OSP, BEx and KRSI shall notify each other of all inquiries or proposals which
such party may receive relating to any of such matters and if such inquiry or
proposal is in writing, shall deliver to the other party a copy of such inquiry
or proposal; provided, however, that nothing contained in this Section 7.4 shall
prohibit the Board of Directors of KRSI from (i) furnishing information to, or
entering into discussions or negotiations with, any person or entity that makes
an unsolicited, bona fide proposal to acquire KRSI pursuant to a merger,
consolidation, share exchange, business combination, tender or exchange offer or
other similar transaction or to acquire a substantial portion of the assets of
KRSI if, and only to the extent that, (A) the Board of Directors of KRSI
determines, which determination is supported by a written legal opinion from
counsel for KRSI reasonably acceptable to OSP, in good faith that such action is
necessary for the Board of Directors of KRSI to comply with its fiduciary duties
to the shareholders of KRSI under applicable law and (B) prior to furnishing
such information to, or entering into discussions or negotiations with, such
person or entity, KRSI (1) provides written notice to OSP to the effect that it
is furnishing information to, or entering into discussions or negotiations with,
such person or entity, (2) receives from such person or entity an executed
agreement to the effect that such person or entity will not disclose any
confidential information of KRSI and (3) subject to the terms of any
confidentiality agreement to which KRSI is a party on the date hereof, keeps OSP
informed of the status (but not the terms) of any such discussions or
negotiations, (ii) complying with Rule 14e-2 promulgated under the Exchange Act
with regard to a tender or exchange offer or (iii) failing to make or
withdrawing or modifying its recommendation referred to in Section 8.1(b) below
following the making of a proposal that constitutes, or may reasonably be
expected to lead to, a Competing Transaction if the Board of Directors of KRSI
determines, which determination is supported by a written legal opinion from
counsel for KRSI reasonably acceptable to OSP, in good faith that such action is
necessary for the Board of Directors of KRSI to comply with its fiduciary duties
to the shareholders of KRSI under applicable law. In the event that the Board of
Directors of KRSI fails to make or withdraws its recommendation referred to in
Section 8.1(b) below and KRSI enters into an agreement to consummate a Competing
Transaction within one year after such failure
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or withdrawal, KRSI shall upon the earlier of the consummation of such Competing
Transaction or the termination of such binding agreement pay to OSP $500,000 in
cash. Any amounts paid to OSP by the Escrow Agent pursuant to the Escrow
Agreement shall reduce the amount of the payment to be made by KRSI to OSP under
the preceding sentence.
ARTICLE VIII -- ADDITIONAL AGREEMENTS
8.1 PREPARATION OF REGISTRATION STATEMENT AND THE PROXY STATEMENT;
SHAREHOLDERS' MEETING.
(a) As soon as practicable following the date of this Agreement, (i)
KRSI shall prepare and file with the SEC the Proxy Statement relating to the
approval by the holders of KRSI Common Stock of the KRSI Merger and this
Agreement and (ii) Global One shall prepare and file with the SEC the
Registration Statement for the purpose of registering the shares of Global
One Common Stock to be issued in the KRSI Merger, in which the Proxy
Statement will be included as a prospectus. The parties hereto shall provide
to each other all information reasonably requested by the Other Parties in
order to permit the Other Parties to comply with the provisions of this
Section 8.1. Each of Global One and KRSI shall use all commercially
reasonable efforts to have the Registration Statement declared effective
under the Securities Act as promptly as practicable after such filing. KRSI
will use its commercially reasonable efforts to cause the Proxy Statement to
be mailed to the shareholders of KRSI as promptly as practicable after the
Registration Statement is declared effective under the Securities Act.
(b) KRSI will, as soon as practicable following the date of this
Agreement, establish a record date (which will be as soon as practicable
following the date of this Agreement) for, duly call, give notice of,
convene and hold the Shareholders' Meeting; provided, however, that KRSI may
postpone or adjourn the Shareholders' Meeting to a date no later than August
31, 1996, in order to facilitate the satisfaction of the condition set forth
in Section 9.1(a) below. KRSI will, through its Board of Directors,
recommend to its shareholders approval of the KRSI Merger and this
Agreement, except to the extent that the Board of Directors of KRSI shall
have withdrawn or modified its approval or recommendation of the KRSI Merger
and this Agreement as permitted by Section 7.4 above.
8.2 INFORMATION SUPPLIED BY GLOBAL ONE AND OSP. Global One, OSP and BEx,
jointly and severally, warrant and represent that none of the information
supplied or to be supplied by Global One, OSP or any of their respective
subsidiaries specifically for inclusion or incorporation by reference in the
Registration Statement or Proxy Statement will, at the time the Registration
Statement or Proxy Statement is filed with the SEC, at any time it is amended or
supplemented and at the time it becomes effective under the Securities Act,
contain any untrue statement of a material fact or omit to state any material
fact required to be stated therein or necessary to make the statements therein,
in light of the circumstances under which they are made, not misleading.
8.3 INFORMATION SUPPLIED BY KRSI. KRSI warrants and represents that none
of the information supplied or to be supplied by KRSI specifically for inclusion
or incorporation by reference in the Registration Statement or Proxy Statement
will, at the time the Registration Statement or Proxy Statement is filed with
the SEC, at any time it is amended or supplemented and at the time it becomes
effective under the Securities Act, contain any untrue statement of a material
fact or omit to state any material fact required to be stated therein or
necessary to make the statements therein, in light of the circumstances under
which they are made, not misleading.
8.4 ACCESS TO INFORMATION. Subject to Section 8.5 below, from the date
hereof to the Effective Time, KRSI, Global One, OSP and their respective
subsidiaries shall each provide to the others access to all information and
documents which the other may reasonably request regarding the business, assets,
liabilities, employees and other aspects of the other party and their respective
subsidiaries, other than the information and documents that in the opinion of
such other party's legal counsel may not be disclosed under applicable law.
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8.5 CONFIDENTIALITY. None of the parties hereto shall release, publish,
reveal or disclose, directly or indirectly, any Evaluation Material of any of
the Other Parties, except (a) to such of its directors, officers, employees,
financial advisors, legal counsel, accountants or other agents, advisors or
representatives as shall require access thereto on a need-to-know basis for the
purpose of the transactions contemplated by this Agreement, including, without
limitation, for purposes of providing information to prospective investors in
the Offering, so long as such persons are informed by the revealing party of the
confidential nature of such information and are directed by it to treat such
information confidentially, (b) to such third parties as are reasonably
necessary to obtain the consents and approvals from such parties to the
transactions contemplated by this Agreement so long as such third parties are
informed by the revealing party of the confidential nature of such information
and are directed by it to treat such information confidentially, and (c) with
the prior written consent of the Other Party, and then only to the extent
specified in such consent. The parties agree to take all reasonable precautions
to safeguard the confidentiality of the Evaluation Material. None of the parties
hereto shall make, or permit to be made, except in furtherance of the
transactions contemplated by this Agreement, any copies, abstracts or summaries
of the Evaluation Material of any of the Other Parties and their subsidiaries.
In addition, all such Evaluation Material shall be used solely for the purposes
of the investigations contemplated by Section 8.4 above, and shall not be
otherwise used to the detriment of any Other Party or its subsidiaries or in
competition with any Other Party or its subsidiaries. The restrictions on
disclosure of information contained in this Section 8.5 do not extend to any
item of information that (i) is publicly known at the time of its disclosure,
(ii) is lawfully received from a third party not bound in a confidential
relationship to any Other Party or its subsidiaries, (iii) is published or
otherwise made known to the public by any Other Party or its subsidiaries, (iv)
was generated independently before its receipt from any Other Party or its
subsidiaries or (v) is required to be disclosed pursuant to a governmental order
or decree or other legal requirement to produce or disclose such item of
information, provided that upon receiving notice that any such order or decree
is being sought or that any such legal requirement is applicable, such
corporation shall promptly give the Other Parties notice thereof and such
corporation shall cooperate with the Other Parties' efforts, if any, to contest
the issuance of such order or decree or the application of such legal
requirement. Upon written request, the parties shall return all writings,
documents and materials containing Evaluation Material. Each of Global One, OSP
and KRSI understand that the Other Parties will not have an adequate remedy at
law for a breach or threatened breach by the revealing party or any of its
subsidiaries of the terms of this Section 8.5, and each corporation therefore
agrees that if there is any such breach or threatened breach, any Other Party
may, in addition to any other legal or equitable remedies available to it,
obtain an injunction or restraining order to enjoin the Other Parties or any of
their subsidiaries from the breach or threatened breach of this Section 8.5.
8.6 PUBLIC ANNOUNCEMENTS. OSP and KRSI will consult with the Other Parties
before issuing any press release or making any public statement with respect to
this Agreement and the transactions contemplated hereby and, except as may be
required by applicable law or any listing agreement with any national securities
exchange, will not issue any such press release or make any such public
statement prior to such consultation.
8.7 APPROPRIATE ACTION; CONSENTS; FILINGS.
(a) Global One, OSP, BEx, the OSP Shareholders and KRSI shall use their
respective best efforts to (i) take, or cause to be taken, all appropriate
action, and do, or cause to be done, all things necessary, proper or
advisable under applicable law or required to be taken by any Governmental
Entity or otherwise to consummate the Reorganization and the transactions
contemplated by this Agreement as promptly as practicable, (ii) obtain from
any Governmental Entities any consents, licenses, permits, waivers,
approvals, authorizations or orders required to be obtained or made by
Global One, OSP, any of their respective subsidiaries or KRSI in connection
with the authorization, execution and delivery of this Agreement and the
consummation of the transactions contemplated hereby, and (iii) as promptly
as practicable, make all necessary filings,
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and thereafter make any other required submissions, with respect to this
Agreement and the Reorganization required under (A) the Securities Act, the
Exchange Act and any other applicable federal or state securities laws and
(B) any other applicable law; provided that Global One, OSP, BEx and KRSI
shall cooperate with each other in connection with the making of all such
filings, including providing copies of all such documents to the Other
Parties and their advisors prior to filing and, if requested, to accept all
reasonable additions, deletions or changes suggested in connection
therewith. Global One, OSP, BEx and KRSI shall use their reasonable best
efforts to furnish to the Other Parties all information required for any
application or other filing to be made pursuant to the rules and regulations
of any applicable law (including all information required to be included in
the Registration Statement and the Proxy Statement) in connection with the
transactions contemplated by the Reorganization and this Agreement.
(b) (i) Global One, OSP, their respective subsidiaries and KRSI shall
give any notices to third parties, and use their reasonable best efforts to
obtain any third party consents, (A) necessary to consummate the
Reorganization and the transactions contemplated by this Agreement, (B)
disclosed or required to be disclosed in the schedules to this Agreement or
(C) required to prevent a Material Adverse Effect on Global One, OSP or
KRSI.
(ii) In the event that Global One, OSP, their respective subsidiaries or
KRSI shall fail to obtain any third party consent described in subsection
(b)(i) above, Global One, OSP or KRSI, as appropriate, shall use their
reasonable best efforts, and shall take any such actions reasonably
requested by the Other Parties, to minimize any adverse effect on Global
One, OSP, their respective subsidiaries and KRSI, and their respective
businesses, resulting, or which could reasonably be expected to result after
the Effective Time, from the failure to obtain any such consent.
(c) From the date of this Agreement until the Effective Time, Global
One, OSP and KRSI shall each promptly notify the Other Parties of any
pending or, to the knowledge of such party, threatened action, proceeding or
investigation by any Governmental Entity or any other person (i) challenging
or seeking material damages in connection with the Reorganization or the
transactions contemplated by this Agreement or (ii) seeking to restrain or
prohibit the consummation of the Reorganization or otherwise limit the right
of KRSI or, to the knowledge of such first party, any subsidiary of KRSI to
own or operate all or any portion of the businesses or assets of OSP, which
in either case is reasonably likely to have a Material Adverse Effect on
KRSI.
(d) Each party shall execute and deliver on and after the execution of
this Agreement such further documents and instruments and take such other
actions as the Other Parties may reasonably request to implement and
effectuate the purposes of and transactions contemplated by this Agreement.
8.8 STATE STATUTES. If any State Takeover Laws shall become applicable to
the transactions contemplated by this Agreement, each of Global One, OSP and
KRSI, as the case may be, and their respective Boards of Directors shall use
their reasonable best efforts to grant such approvals and take such actions as
are necessary so that the transactions contemplated by this Agreement may be
consummated as promptly as practicable on the terms contemplated by this
Agreement and otherwise to minimize the effects of such State Takeover Law on
the transactions contemplated by this Agreement. Nothing herein shall limit or
affect KRSI in taking actions specifically permitted by Section 7.4 above.
8.9 DIRECTORS' AND OFFICERS' INDEMNIFICATION AND INSURANCE.
(a) Prior to the Effective Time, KRSI shall use its commercially
reasonable efforts to obtain directors' and officers' insurance coverage in
form and substance reasonably acceptable to OSP, the OSP Shareholders and
Global One to provide for coverage of the directors and officers of OSP and
Global One with respect to claims that may be asserted by KRSI's
shareholders or creditors arising in connection with the transactions
contemplated by this Agreement.
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(b) The parties hereto shall use their respective best efforts to cause
Global One to keep in effect provisions in its by-laws with respect to
exculpation of director and officer liability and indemnification to the
fullest extent permitted under the DGCL, which provisions shall not be
amended, repealed or otherwise modified except as required by applicable law
or except to make changes permitted by law that would enlarge the
exculpation or rights of indemnification thereunder. In addition, the
parties hereby acknowledge and agree that Global One will obtain directors'
and officers' insurance for the directors and officers of Global One that
will provide for a minimum of $5 million of coverage for any individual
claim.
(c) At the Effective Time, Global One shall enter into indemnification
agreements in form and substance reasonably satisfactory to KRSI, OSP and
their respective officers and directors with each person who is a director
and officer of KRSI or OSP immediately prior to the Effective Time for the
purpose of indemnifying such persons to the fullest extent permitted under
the DGCL.
(d) Global One shall reimburse all expenses, including reasonable
attorneys' fees, incurred by any person required to enforce the indemnity
and other obligations of Global One under this Section 8.9 if such person is
entitled to reimbursements under the by-laws, the DGCL or any
indemnification agreement.
(e) The directors and officers referred to in Section 8.9(c) above shall
be third party beneficiaries of this Section 8.9, and the rights under this
Section 8.9 shall be in addition to any other rights under Minnesota law,
Delaware law or otherwise. In addition, the directors and officers of KRSI
referred to in Section 8.9(c) above shall be third party beneficiaries of
the representations, warranties and covenants of Global One, OSP and the OSP
Shareholders made in this Agreement, and the directors and officers of
Global One and OSP referred to in Section 8.9(c) above shall be third party
beneficiaries of the representations, warranties and covenants of KRSI made
in this Agreement. This Section 8.9 shall survive the consummation of the
Mergers and the Reorganization.
8.10 ESCROW PAYMENTS.
(a) KRSI has delivered to the Escrow Agent the sum of one hundred
thousand dollars ($100,000) to be held pursuant to the Escrow Agreement.
(b) Promptly after the date of execution of this Agreement, but in any
event prior to the Shareholders' Meeting, KRSI shall deliver to the Escrow
Agent an additional sum of one hundred fifty thousand dollars ($150,000).
8.11 EMPLOYMENT CONTRACTS. The parties shall use their respective
reasonable best efforts to cause Global One to enter into employment contracts
to be effective as of the Effective Time with George J. Vrabeck, Angard and Malm
in substantially the form attached hereto as Exhibits 8.11-1, 8.11-2 and 8.11-3,
respectively.
8.12 INDEMNIFICATION.
(a) INDEMNIFICATION BY GLOBAL ONE AND OSP. Subject to the limitations
set forth in Section 8.12(b) below, Global One and OSP, jointly and
severally, shall indemnify and hold KRSI harmless at all times from and
after the date of this Agreement against and in respect of all damages,
losses, costs and expenses (including reasonable attorney fees) which KRSI
may suffer or incur in connection with any material breach by Global One or
OSP of any of their respective representations, warranties or covenants in
this Agreement.
(b) LIMITATION OF LIABILITY OF GLOBAL ONE AND OSP. KRSI shall not
assert any claim under Section 8.12(a) above unless and until such claims
exceed an aggregate of $50,000 and any claim under Section 8.12(a) above
must be asserted within one year from the Effective Time or be
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forever barred. The rights of KRSI with respect to any claims arising under
Section 8.12(a) above shall be limited to recovery of actual losses, costs
and expenses (including reasonable attorney fees).
(c) INDEMNIFICATION BY THE OSP SHAREHOLDERS. Subject to the
limitations set forth in Section 8.12(d) below, the OSP Shareholders,
jointly and severally, shall indemnify and hold KRSI harmless at all times
from and after the date of this Agreement against and in respect of all
damages, losses, costs and expenses (including reasonable attorney fees)
which KRSI may suffer or incur in connection with any material breach by the
OSP Shareholders of any of their respective representations, warranties or
covenants in this Agreement.
(d) LIMITATION OF LIABILITY OF THE OSP SHAREHOLDERS. KRSI shall not
assert any claim under Section 8.12(c) above unless and until such claims
exceed an aggregate of $50,000 and any claim under Section 8.12(c) above
must be asserted within one year from the Effective Time or be forever
barred. The rights of KRSI with respect to any claims arising under Section
8.12(c) above shall be limited to recovery of actual losses, costs and
expenses (including reasonable attorney fees).
(e) INDEMNIFICATION BY KRSI. Subject to the limitations set forth in
Section 8.12(f) below, KRSI shall indemnify and hold Global One, OSP and the
OSP Shareholders harmless at all times from and after the date of this
Agreement, against and in respect of all losses, damages, costs and expenses
(including reasonable attorney fees) which Global One, OSP or the OSP
Shareholders may suffer or incur in connection with any material breach by
KRSI of any of its representations, warranties or covenants in this
Agreement.
(f) LIMITATION OF LIABILITY OF KRSI. Global One, OSP and the OSP
Shareholders shall not assert any claim under Section 8.12(e) above unless
and until such claims exceed an aggregate of $50,000 and any claim under
Section 8.12(e) above must be asserted within one year from the Effective
Time or be forever barred. The rights of Global One, OSP and the OSP
Shareholders with respect to any claims arising under Section 8.12(e) above
shall be limited to recovery of actual losses, costs and expenses (including
reasonable attorney fees).
(g) THIRD PARTY CLAIMS. If a claim by a third party is made against
any of the indemnified parties, and if any of the indemnified parties
intends to seek indemnity with respect to such claim under this Section
8.12, such indemnified party shall promptly notify the indemnifying party of
such claim. The indemnifying party shall have thirty (30) days after receipt
of the above-mentioned notice to undertake, conduct and control, through
counsel of such party's own choosing (subject to the consent of the
indemnified party, such consent not to be unreasonably withheld) and at such
party's expense, the settlement or defense of it, and the indemnified party
shall cooperate with the indemnifying party in connection with such efforts;
provided that: (i) the indemnifying party shall not by this Agreement permit
to exist any lien, encumbrance or other adverse charge upon any asset of any
indemnified party, (ii) the indemnifying party shall permit the indemnified
party to participate in such settlement or defense through counsel chosen by
the indemnified party, provided that the fees and expenses of such counsel
shall be borne by the indemnified party, and (iii) the indemnifying party
shall agree promptly to reimburse the indemnified party for the full amount
of any loss resulting from such claim and all related expense incurred by
the indemnified party pursuant to this Section. So long as the indemnifying
party is reasonably contesting any such claim in good faith, the indemnified
party shall not pay or settle any such claim. If the indemnifying party does
not notify the indemnified party within thirty (30) days after receipt of
the indemnified party's notice of a claim of indemnity under this Section
that such party elects to undertake the defense of such claim, the
indemnified party shall have the right to contest, settle or compromise the
claim in the exercise of the indemnified party's exclusive discretion at the
expense of the indemnifying party.
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ARTICLE IX -- CONDITIONS TO THE MERGERS
9.1 CONDITIONS OF THE PARTIES' OBLIGATIONS TO EFFECT THE KRSI MERGER. The
respective obligations of KRSI Acquisition and KRSI to consummate the KRSI
Merger are subject to the satisfaction, on or prior to the Closing, of the
following conditions:
(a) SHAREHOLDER APPROVAL. This Agreement and the KRSI Merger shall
have been approved by the affirmative vote of the holders of a majority of
shares of outstanding KRSI Common Stock in accordance with the MNBCA and the
articles of incorporation and by-laws of KRSI.
(b) THE OFFERING. The Offering shall have been completed in such a
manner that Global One shall have received, or shall receive simultaneous
with the Closing, gross proceeds from the Offering of at least $6,000,000.
(c) GOVERNMENTAL ENTITY APPROVALS. All authorizations, consents,
orders or approvals of, or declarations or filings with, or expiration of
waiting periods imposed by, any Governmental Entity necessary for the
consummation of the transactions contemplated by this Agreement shall have
been filed, expired or been obtained.
(d) REGISTRATION STATEMENT; PROXY STATEMENT. The Registration
Statement shall have become effective under the Securities Act and shall not
be the subject of any stop order or proceedings seeking a stop order and the
Proxy Statement shall not at the Effective Time be subject to any
proceedings commenced or threatened by the SEC.
(e) NO INJUNCTIONS OR RESTRAINTS. No temporary restraining order,
preliminary or permanent injunction or other order issued by any
Governmental Entity of competent jurisdiction nor other legal restraint or
prohibition preventing the consummation of the Mergers, the Offering, the
Reorganization or any other transaction contemplated by this Agreement shall
be in effect.
(f) STATUTES. No action shall have been taken, and no statute, rule,
regulation or order shall have been enacted, promulgated or issued or deemed
applicable to any part of the Reorganization by any Governmental Entity
which would (i) make the consummation of any part of the Reorganization
illegal or (ii) render OSP, BEx or KRSI unable to consummate any portion of
the Reorganization, except for any waiting period provisions.
(g) The BEx Merger and the OSP Merger shall have been completed.
9.2 CONDITIONS OF OBLIGATION OF KRSI. The obligation of KRSI to consummate
the KRSI Merger is subject to the satisfaction, upon or prior to the Closing, of
the following conditions, unless waived by KRSI.
(a) REPRESENTATIONS AND WARRANTIES. The representations and warranties
of Global One, BEx, OSP and the OSP Shareholders set forth in this
Agreement, without regard to any qualification or reference to immateriality
or "Material Adverse Effect," shall be true and correct in all respects as
of the Closing Date, as though made on and as of such date (provided that
those representations or warranties made as of a particular date need only
be true and correct as of such date), except for any inaccuracies which,
individually or in the aggregate, have not had, and would not have, a
Material Adverse Effect on Global One, OSP or any of their subsidiaries;
provided, however, that there shall be deemed not to be such a Material
Adverse Effect to the extent that such effect is the result of conditions or
factors affecting the economy generally or the industry in which Global One
or OSP operates or the result of the announcement of the Reorganization or
actions taken in contemplation thereof. KRSI shall have received a
certificate signed on behalf of Global One by the chief executive officer
and chief financial officer of Global One to such effect with regard to
Global One, and a certificate signed on behalf of OSP by the chief executive
officer and chief financial officer of OSP to such effect with regard to
OSP.
(b) PERFORMANCE OF OBLIGATIONS OF GLOBAL ONE AND OSP. Global One, OSP
and BEx shall have performed in all material respects all obligations and
covenants required to be performed by
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them under this Agreement prior to or as of the Closing Date, unless waived
in writing by KRSI, and KRSI shall have received a certificate signed on
behalf of Global One by the chief executive officer and the chief financial
officer of Global One to such effect with regard to Global One, and a
certificate signed on behalf of OSP by the chief executive officer and the
chief financial officer of OSP to such effect with regard to OSP.
(c) CONSENTS. The consents, approvals and authorizations described (or
required to be described) on Schedule 5.5 hereto shall have been obtained in
form and in substance reasonably satisfactory to KRSI, except for such
consents, approvals and authorizations with respect to which the failure to
obtain would not have a Material Adverse Effect on Global One, OSP, their
respective subsidiaries or the Acquisition Companies.
(d) FAIRNESS OPINION. KRSI shall have received from the KRSI Financial
Advisor an opinion in form and substance reasonably satisfactory to KRSI
that the merger of KRSI and KRSI Acquisition and the other transactions
contemplated by the Reorganization and this Agreement are fair to the
shareholders of KRSI from a financial point of view; provided, however, that
the condition set forth in this Section 9.2(d) shall be deemed satisfied if
KRSI fails to use all commercially reasonable efforts to obtain such
fairness opinion.
9.3 CONDITIONS OF OBLIGATION OF KRSI ACQUISITION. The obligation of KRSI
Acquisition to effect the KRSI Merger is subject to the satisfaction, upon or
prior to the Closing, of the following conditions, unless waived by KRSI
Acquisition:
(a) REPRESENTATIONS AND WARRANTIES. The representations and warranties
of KRSI set forth in this Agreement, without regard to any qualification or
reference to immateriality or "Material Adverse Effect," shall be true and
correct in all respects as of the Closing Date, as though made on and as of
such date (provided that those representations or warranties made as of a
particular date need only be true and correct as of such date), except for
any inaccuracies which, individually or in the aggregate, have not had, and
would not have, a Material Adverse Effect on KRSI; provided, however, that
there shall be deemed not to be such a Material Adverse Effect to the extent
that such effect is the result of conditions or factors affecting the
economy generally or the industry in which KRSI operates or the result of
the announcement of the Mergers or actions taken in contemplation thereof.
OSP shall have received a certificate signed on behalf of KRSI by the chief
executive officer and the chief financial officer of KRSI to such effect.
(b) PERFORMANCE OF OBLIGATIONS OF KRSI. KRSI shall have performed in
all material respects all obligations and covenants required to be performed
by them under this Agreement prior to or as of the Closing Date, unless
waived in writing by OSP and/or the OSP Shareholders, and OSP shall have
received a certificate signed on behalf of KRSI by the chief executive
officer and the chief financial officer of KRSI to such effect.
(c) CONSENTS. The consents, approvals and authorizations described (or
required to be described on Schedules 5.5 and 6.5 hereto) on Schedules 5.5
and 6.5 hereto shall have been obtained in form and substance reasonably
satisfactory to OSP, except for such consents, approvals and authorizations
with respect to which the failure to obtain would not have a Material
Adverse Effect on KRSI or KRSI Acquisition.
(d) REVIEW OF KRSI SECURITIES. OSP shall have received a letter from
KRSI's independent auditors or legal counsel indicating (i) the number of
shares of KRSI Common Stock that have been authorized for issuance by the
board of directors of KRSI as set forth in the minutes in the KRSI minute
book and (ii) the number of shares of KRSI Common Stock subject to warrants
and options to purchase them that have been authorized by the board of
directors of KRSI as set forth in the minutes in the KRSI minute book.
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ARTICLE X -- TERMINATION, AMENDMENT AND WAIVER
10.1 TERMINATION. This Agreement may be terminated and the Reorganization
may be abandoned at any time prior to the Effective Time, notwithstanding any
requisite approval of this Agreement and the Reorganization by the shareholders
of KRSI:
(a) by mutual written consent of KRSI and OSP; or
(b) by either KRSI or OSP if either (i) the Effective Time shall not
have occurred on or before August 31, 1996; provided, however, that the
right to terminate this Agreement under this Section 10.1(b) shall not be
available to any party whose failure to fulfill any obligation under this
Agreement has been the cause of, or resulted in, the failure of the
Effective Time to occur on or before such date, or (ii) there shall be any
law that makes consummation of any part of the Reorganization illegal or
otherwise prohibited or if any court of competent jurisdiction or
Governmental Entity shall have issued an order, decree, ruling or taken any
other action restraining, enjoining or otherwise prohibiting any part of the
Reorganization and such order, decree, ruling or other action shall have
become final and unappealable; provided that the party seeking to terminate
this Agreement pursuant to this subsection (b)(ii) shall have complied with
its obligations under Section 8.7 above; or
(c) by OSP, if (i) the Board of Directors of KRSI withdraws, modifies or
changes its recommendation of this Agreement or any part of the
Reorganization in a manner adverse to OSP or shall have resolved to do any
of the foregoing or the Board of Directors of KRSI shall have recommended to
the shareholders of KRSI any Competing Transaction or resolved to do so,
(ii) KRSI receives an unsolicited proposal that constitutes a Competing
Transaction and the Board of Directors of KRSI, within 30 calendar days
after such proposal is received by KRSI, either fails to terminate
discussions with the maker of such proposal and its agents, or determines to
accept, or takes no position with respect to, such proposal, (iii) a tender
offer or exchange offer for 25% or more of the outstanding shares of KRSI
Common Stock is commenced, and the Board of Directors of KRSI, within 10
business days after such tender offer or exchange offer is so commenced,
either fails to recommend against acceptance of such tender offer or
exchange offer by its shareholders or takes no position with respect to the
acceptance of such tender offer or exchange offer by its shareholders or
(iv) any person shall have acquired beneficial ownership or the right to
acquire beneficial ownership of, or any "group" (as such term is defined
under Section 13(d) of the Exchange Act and the rules and regulations
promulgated thereunder) shall have been formed which beneficially owns, or
has the right to acquire beneficial ownership of, 25% or more of the then
outstanding shares of KRSI Common Stock (excluding for this purpose holdings
of shares by persons or groups as currently reflected in filings with the
SEC under Section 13(d)); or
(d) by KRSI, if the Board of Directors of KRSI shall have recommended or
resolved to recommend to the shareholders of KRSI a proposal for a Competing
Transaction under circumstances where a majority of such Directors
reasonably determines in good faith, that failure to accept such proposal
would be a breach of the fiduciary duty of such Directors; or
(e) by either KRSI or OSP, if the Shareholders' Meeting shall have been
held and the shareholders of KRSI shall have failed to approve the KRSI
Merger or this Agreement at such meeting (including any adjournment or
postponement thereof); or
(f) by OSP, in the event of a material breach by KRSI of any
representation, warranty, covenant or agreement contained herein which has
not been cured or is not curable on or before August 31, 1996; or
(g) by KRSI, in the event of a material breach by Global One, OSP or the
OSP Shareholders of any representation, warranty, covenant or agreement
contained herein which has not been cured or is not curable on or before
August 31, 1996.
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10.2 CONSEQUENCES OF TERMINATION.
(a) In the event KRSI terminates this Agreement other than in compliance
with Section 10.1 above, or in the event OSP terminates this Agreement in
compliance with the provisions of Section 10.1(b)(i) above because the
Effective Time has not occurred on or before August 31, 1996 as a result of
a material breach of this Agreement by KRSI or in compliance with the
provisions of Section 10.1(e) or (f) above, OSP shall be entitled to all of
the funds held by the Escrow Agent pursuant to the Escrow Agreement as
liquidated damages, and in such event, Global One, OSP and the OSP
Shareholders may not pursue any other remedies at law or equity.
(b) KRSI may pursue any remedies available at law or equity in the event
Global One or OSP terminates this Agreement other than in compliance with
Section 10.1 above, or in the event KRSI terminates this Agreement in
compliance with the provisions of Section 10.1(b)(i) above because the
Effective Time has not occurred on or before August 31, 1996 as a result of
a material breach of this Agreement by Global One, OSP or the OSP
Shareholders or in compliance with the provisions of Section 10.1(g) above.
10.3 AMENDMENT. This Agreement may be amended by the parties hereto by
action taken by or on behalf of their respective Boards of Directors at any time
prior to the Effective Time; provided, however, that, after the approval of the
KRSI Merger and this Agreement by the shareholders of KRSI, no amendment may be
made which would reduce the amount or change the type of consideration to be
received by the shareholders of KRSI or OSP upon consummation of the Mergers.
This Agreement may not be amended except by an instrument in writing signed by
the parties hereto.
10.4 WAIVER. At any time prior to the Effective Time, any party hereto may
(a) extend the time for the performance of any obligation or other act of any
other party hereto, (b) waive any inaccuracy in the representations and
warranties contained herein or in any document delivered pursuant hereto and (c)
waive compliance with any agreement or condition contained herein. Any such
extension or waiver shall be valid if set forth in any instrument in writing
signed by the party or parties to be bound thereby.
ARTICLE XI -- GENERAL PROVISIONS
11.1 SURVIVAL OF REPRESENTATIONS AND WARRANTIES. The representations and
warranties in this Agreement and in any instrument delivered pursuant to this
Agreement shall survive for one year following the Effective Time.
11.2 NOTICES. All notices, requests, claims, demands and other
communications to any party hereunder shall be in writing (including telecopy or
similar writing) and shall be deemed given if delivered personally, by
facsimile, by certified mail (postage prepaid, return receipt requested) or sent
by overnight courier (in each case, providing proof of delivery) to the parties
at the following addresses and/or facsimile numbers set forth at the beginning
of this Agreement (or such other address or facsimile number for a party as
shall be specified in like notice).
11.3 ENTIRE AGREEMENT. This Agreement (including the Exhibits and
Schedules hereto) and the other documents referenced herein contain the entire
agreement between the parties with respect to the subject matter hereof and
supersede all prior arrangements and understandings, both written and oral, with
respect thereto.
11.4 SEVERABILITY. It is the desire and intent of the parties that the
provisions of this Agreement be enforced to the fullest extent permissible under
the law and public policies applied in each jurisdiction in which enforcement is
sought. Accordingly, in the event that any provision of this Agreement would be
held in any jurisdiction to be invalid, prohibited or unenforceable for any
reason, such provision, as to such jurisdiction, shall be ineffective, without
invalidating the remaining provisions of this Agreement or affecting the
validity or enforceability of such provision in any other jurisdiction.
Notwithstanding the foregoing, if such provision could be more narrowly drawn so
as not
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to be invalid, prohibited or unenforceable in such jurisdiction, it shall, as to
such jurisdiction, be so narrowly drawn, without invalidating the remaining
provisions of this Agreement or affecting the validity or enforceability of such
provision in any other jurisdiction.
11.5 SUCCESSORS AND ASSIGNS. The provisions of this Agreement shall be
binding upon and inure to the benefit of the parties hereto and their respective
successors and assigns, provided that no party may assign, delegate or otherwise
transfer any of its rights or obligations under this Agreement without the
consent of the other parties hereto.
11.6 PARTIES IN INTEREST. This Agreement shall be binding upon and insure
solely to the benefit of each party hereto, and nothing in this Agreement,
express or implied, is intended to or shall confer upon any other person any
right, benefit or remedy of any nature whatsoever under or by reason of this
Agreement, other than Section 8.9 above (which is intended to be for the benefit
of the persons covered by the indemnification provisions contained therein and
may be enforced by such persons).
11.7 ENFORCEMENT. The parties agree that irreparable damage would occur in
the event that any of the provisions of this Agreement were not performed in
accordance with their specific terms or were otherwise breached. It is
accordingly agreed that the parties shall be entitled to an injunction or
injunctions to prevent breaches of this Agreement and to enforce specifically
the terms and provisions of this Agreement in any court of the United States
located in the State of California or in a California state court, this being in
addition to any other remedy to which they are entitled at law or in equity. In
addition, each of the parties hereto (a) consents to submit itself to the
personal jurisdiction of any federal court located in the State of California or
any California state court in the event any dispute arises out of this
Agreement, (b) agrees that it will not attempt to deny or defeat such personal
jurisdiction by motion or other request for leave from any such court and (c)
agrees that it will not bring any action relating to this Agreement or the
transactions contemplated by this Agreement in any court other than a federal
court sitting in the State of California or a California state court.
11.8 GOVERNING LAW. This Agreement shall be construed in accordance with
and governed by the law of the State of California, without giving effect to the
principles of conflict of laws thereof.
11.9 COUNTERPARTS; EFFECTIVENESS. This Agreement may be signed in any
number of counterparts, each of which shall be an original, with the same effect
as if the signatures thereto and hereto were upon the same instrument. This
Agreement shall become effective when each party hereto shall have received
counterparts hereof signed by all of the other parties hereto.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly
executed as of the day and year first above written.
GLOBAL ONE DISTRIBUTION &
MERCHANDISING INC.
By ___________________________________
Name:
Title:
OSP PUBLISHING, INC.
By ___________________________________
Name:
Title:
(signatures continued on next page)
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O.S.P. ACQUISITION CORP.
By ___________________________________
Name:
Title:
KELLY RUSSELL STUDIOS, INC.
By ___________________________________
Name:
Title:
KRSI ACQUISITION CORP.
By ___________________________________
Name:
Title:
THE BUTTON EXCHANGE, LTD.
By ___________________________________
Name:
Title:
BEx ACQUISITION CORP.
By ___________________________________
Name:
Title:
______________________________________
Joseph C. Angard
______________________________________
Michael A. Malm
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<PAGE>
APPENDIX B
OPINION OF EQUISOURCE
May 23, 1996
Board of Directors
Kelly Russell Studios, Inc.
2905 Northwest Blvd.
Suite 220
Plymouth, Minnesota
Gentlemen:
You have requested The Equisource Group ("Equisource") to render an opinion
as to the fairness, from a financial point of view, to Kelly Russell Studios,
Inc. ("KRSI") and its shareholders of the proposed merger to be effected under
the terms of the Final Amended and Restated Agreement and Plan of Reorganization
between KRSI, Global One Distribution & Merchandising Inc. ("Global One"), KRSI
Acquisition Corp. ("KRSI Acquisition"), O.S.P. Publishing, Inc. ("OSP"), O.S.P.
Acquisition Corp. ("OSP Acquisition"), The Button Exchange, LTD ("BEx"), BEx
Acquisition Corp. ("BEx Acquisition"). Joseph C. Angard and Michael A. Malm,
(the "Agreement").
We understand that under the terms of the Agreement, Global One will
exchange 2,041,187 shares of Global One common stock, representing approximately
15.7% of Global One immediately after completion of the transaction, for all of
the issued and outstanding shares of KRSI's common stock. The Global One shares
issued to the KRSI shareholders will be registered pursuant to a registration
statement filed with the Securities and Exchange Commission under the provisions
of The Securities Act of 1933. After the merger, the existing OSP shareholders
will hold 6,448,088 shares, representing approximately 49.6% of the surviving
company 4,504,234 shares of Global One common stock, representing approximately
34.7% of Global One, will be issued at $1.50 per share to provide financing for
the transaction. Warrants and options for the purchase of 3,143,033 shares of
Global One common stock will be outstanding immediately after closing, 197,069
of which will be exercisable at a nominal price, with the balance to be
exercisable at prices ranging from $1.50 to $8.40 per share.
In arriving at our opinion, we have reviewed, among other information (i)
the Agreement; (ii) audited financial statements for O.S.P. Publishing, Inc. and
Subsidiaries for the years ended December 31, 1994 and 1993, and preliminary
audited consolidated balance sheets as of December 31, 1995 and 1994, and the
related consolidated statements of operations for the three years ended December
31, 1995, prepared by Deloitte & Touche LLP; (iii) audited financial statements
prepared for Kelly Russell Studios, Inc. by McGladrey & Pullen for the three
years ended December 31, 1994, with preliminary audited statements for the year
ended December 31, 1995; (iv) certain financial and operating information
relating to OSP, including forecasts provided by OSP's management and OSP's
financial advisor; (v) certain financial and operating information relating to
KRSI, including forecasts internally provided by KRSI management; (vi) public
market price information and trading volumes for KRSI's common stock from March
31, 1994 to April 3, 1996; (vii) the operating results, financial condition and
market performance of various companies with publicly traded stock and which we
deem to be engaged in businesses similar to those of KRSI and OSP; (viii) such
other information, analyses, investigations and financial, economic and market
criteria we considered relevant.
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In addition to the above described information, we have discussed with the
board of directors and management of KRSI the overall business operations and
future prospects of KRSI in the event the merger is not consummated, and have
held similar discussions with OSP management. With respect to the financial
forecasts, we have assumed that they have been reasonably prepared on the basis
of the best estimates and judgments of KRSI's and OSP's managements as to the
future performance of the respective companies. We have not been provided, nor
have we considered, pro forma combined financial statements based on forecasts.
In connection with our review, we have not assumed any responsibility for
independent verification of any of the foregoing information, including
financial forecasts provided by the Company and OSP, and have relied on such
information provided by KRSI and OSP being complete and accurate in all material
respects. We have not been furnished with any independent evaluations or
appraisals of the assets or liabilities of KRSI, OSP or OSP's subsidiaries. Our
opinion is necessarily based upon financial, economic, market and other
conditions as they exist and can be evaluated on the date hereof.
We have acted as financial advisor to KRSI in connection with the merger and
will receive a fee for our services, a significant portion of which is
contingent upon the consummation of the merger.
Our opinion is directed to the Board of Directors of KRSI and does not
constitute a recommendation as to how KRSI's shareholders should vote at the
shareholders' meeting to consider and vote on the proposed merger.
Based upon and subject to the foregoing, it is our opinion that, as of the
date hereof, the proposed merger is fair, from a financial point of view, to
KRSI and its shareholders.
Very truly yours,
The Equisource Group
By: /s/ Robert H. Thurmond III
Robert H. Thurmond III
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APPENDIX C
MINNESOTA BUSINESS CORPORATION ACT
302A.471. RIGHTS OF DISSENTING SHAREHOLDERS
Subdivision 1. ACTIONS CREATING RIGHTS. A shareholder of a corporation may
dissent from, and obtain payment for the fair value of the shareholder's shares
in the event of, any of the following corporate actions:
(a) An amendment of the articles that materially and adversely affects
the rights or preferences of the shares of the dissenting shareholder in
that it:
(1) alters or abolishes a preferential right of the shares;
(2) creates, alters, or abolishes a right in respect of the
redemption of the shares, including a provision respecting a sinking fund
for the redemption or repurchase of the shares;
(3) alters or abolishes a preemptive right of the holder of the
shares to acquire shares, securities other than shares, or rights to
purchase shares or securities other than shares;
(4) excludes or limits the right of a shareholder to vote on a
matter, or to cumulate votes, except as the right may be excluded or
limited through the authorization or issuance of securities of an
existing or new class or series with similar or different voting rights;
except that an amendment to the articles of an issuing public corporation
that provides that section 302A.671 does not apply to a control share
acquisition does not give rise to the right to obtain payment under this
section;
(b) A sale, lease, transfer, or other disposition of all or
substantially all of the property and assets of the corporation, but not
including a transaction permitted without shareholder approval in section
302A.661, subdivision 1, or a disposition in dissolution described in
section 302A.725, subdivision 2, or a disposition pursuant to an order of a
court, or a disposition for cash on terms requiring that all or
substantially all of the net proceeds of disposition be distributed to the
shareholders in accordance with their respective interests within one year
after the date of disposition;
(c) A plan of merger, whether under this chapter or under chapter 322B,
to which the corporation is a party, except as provided in subdivision 3;
(d) A plan of exchange, whether under this chapter or under chapter 322B
to which the corporation is a party as the corporation whose shares will be
acquired by the acquiring corporation, if the shares of the shareholder are
entitled to be voted on the plan; or
(e) Any other corporate action taken pursuant to a shareholder vote with
respect to the articles, the bylaws, or a resolution approved by the board
directs that dissenting shareholders may obtain payment for their shares.
Subd. 2. BENEFICIAL OWNERS. (a) A shareholder shall not assert
dissenters' rights as to less than all of the shares registered in the name of
the shareholder, unless the shareholder dissents with respect to all the shares
that are beneficially owned by another person but registered in the name of the
shareholder and discloses the name and address of each beneficial owner on whose
behalf the shareholder dissents. In that event, the rights of the dissenter
shall be determined as if the shares as to which the shareholder has dissented
and the other shares were registered in the names of different shareholders.
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(b) The beneficial owner of shares who is not the shareholder may assert
dissenters' rights with respect to shares held on behalf of the beneficial
owner, and shall be treated as a dissenting shareholder under the terms of this
section and section 302A.473, if the beneficial owner submits to the corporation
at the time of or before the assertion of the rights a written consent of the
shareholder.
Subd. 3. RIGHTS NOT TO APPLY. Unless the articles, the bylaws, or a
resolution approved by the board otherwise provide, the right to obtain payment
under this section does not apply to a shareholder of the surviving corporation
in a merger, if the shares of the shareholder are not entitled to be voted on
the merger.
Subd. 4. OTHER RIGHTS. The shareholders of a corporation who have a right
under this section to obtain payment for their shares do not have a right at law
or in equity to have a corporate action described in subdivision 1 set aside or
rescinded, except when the corporate action is fraudulent with regard to the
complaining shareholder or the corporation.
302A.473. PROCEDURES FOR ASSERTING DISSENTERS' RIGHTS
Subdivision 1. DEFINITIONS. (a) For purposes of this section, the terms
defined in this subdivision have the meanings given them.
(b) "Corporation" means the issuer of the shares held by a dissenter before
the corporate action referred to in section 302A.471, subdivision 1 or the
successor by merger of that issuer.
(c) "Fair value of the shares" means the value of the shares of a
corporation immediately before the effective date of the corporate action
referred to in section 302A.471, subdivision 1.
(d) "Interest" means interest commencing five days after the effective date
of the corporate action referred to in section 302A.471, subdivision 1, up to
and including the date of payment, calculated at the rate provided in section
549.09 for interest on verdicts and judgments.
Subd. 2. NOTICE OF ACTION. If a corporation calls a shareholder meeting at
which any action described in section 302A.471, subdivision 1 is to be voted
upon, the notice of the meeting shall inform each shareholder of the right to
dissent and shall include a copy of section 302A.471 and this section and a
brief description of the procedure to be followed under these sections.
Subd. 3. NOTICE OF DISSENT. If the proposed action must be approved by the
shareholders, a shareholder who wishes to exercise dissenters' rights must file
with the corporation before the vote on the proposed action a written notice of
intent to demand the fair value of the shares owned by the shareholder and must
not vote the shares in favor of the proposed action.
Subd. 4. NOTICE OF PROCEDURE; DEPOSIT OF SHARES. (a) After the proposed
action has been approved by the board and, if necessary, the shareholders, the
corporation shall send to all shareholders who have complied with subdivision 3
and to all shareholders entitled to dissent if no shareholder vote was required,
a notice that contains:
(1) The address to which a demand for payment and certificates of
certificated shares must be sent in order to obtain payment and the date by
which they must be received;
(2) Any restrictions on transfer of uncertified shares that will apply
after the demand for payment is received;
(3) A form to be used to certify the date on which the shareholder, or
the beneficial owner on whose behalf the shareholder dissents, acquired the
shares or an interest in them and to demand payment; and
(4) A copy of section 302A.471 and this section and a brief description
of the procedures to be followed under these sections.
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(b) In order to receive the fair value of the shares, a dissenting
shareholder must demand payment and deposit certificated shares or comply with
any restrictions on transfer of uncertificated shares within 30 days after the
notice required by paragraph (a) was given, but the dissenter retains all other
rights of a shareholder until the proposed action takes effect.
Subd. 5. PAYMENT; RETURN OF SHARES. (a) After the corporate action takes
effect, or after the corporation receives a valid demand for payment, whichever
is later the corporation shall remit to each dissenting shareholder who has
complied with subdivisions 3 and 4 the amount the corporation estimates to be
the fair value of the shares, plus interest, accompanied by:
(1) The corporation's closing balance sheet and statement income for a
fiscal year ending not more than 16 months before the effective date of the
corporate action, together with the latest available interim financial
statements;
(2) An estimate by the corporation of the fair value of the shares and a
brief description of the method used to reach the estimate; and
(3) A copy of section 302A.471 and this section, and a brief description
of the procedure to be followed in demanding supplemental payment.
(b) The corporation may withhold the remittance described in paragraph (a)
from a person who was not a shareholder on the date the action dissented from
was first announced to the public or who is dissenting on behalf of a person who
was not a beneficial owner on that date. If the dissenter has complied with
subdivision 3 and 4, the corporation shall forward to the dissenter the
materials described in paragraph (a), a statement of the reason for withholding
the remittance, and an offer to pay to the dissenter the amount listed in the
materials if the dissenter agrees to accept that amount in full satisfaction.
The dissenter may decline the offer and demand payment under subdivision 6.
Failure to do so entitles the dissenter only to the amount offered. If the
dissenter makes demand, subdivisions 7 and 8 apply.
(c) If the corporation fails to remit payment within 60 days of the deposit
of certificates or the imposition of transfer restrictions on uncertificated
shares, it shall return all deposited certificates and cancel all transfer
restrictions. However, the corporation may again give notice under subdivision 4
and require deposit or restrict transfer at a later time.
Subd. 6. SUPPLEMENTAL PAYMENT; DEMAND. If a dissenter believes that the
amount remitted under subdivision 5 is less than the fair value of the shares
plus interest, the dissenter may give written notice to the corporation of the
dissenter's own estimate of the fair value of the shares, plus interest, within
30 days after the corporation mails the remittance under subdivision 5, and
demand payment of the difference. Otherwise, a dissenter is entitled only to the
amount remitted by the corporation.
Subd. 7. PETITION; DETERMINATION. If the corporation receives a demand
under subdivision 6, it shall, within 60 days after receiving the demand, either
pay to the dissenter the amount demanded or agreed to by the dissenter after
discussion with the corporation or file in court a petition requesting that the
court determine the fair value of the shares, plus interest. The petition shall
be filed in the county in which the registered office of the corporation is
located, except that a surviving foreign corporation that receives a demand
relating to the shares of a constituent domestic corporation shall file the
petition in the county in this state in which the last registered office of the
constituent corporation was located. The petition shall name as parties all
dissenters who have demanded payment under subdivision 6 and who have not
reached agreement with the corporation. The corporation shall, after filing the
petition, serve all parties with a summons and copy of the petition under the
rules of civil procedure. Nonresidents of this state may be served by registered
or certified mail or by publication as provided by law. Except as otherwise
provided, the rules of civil procedure apply to this proceeding. The
jurisdiction of the court is plenary and exclusive. The court may appoint
appraisers, with powers and authorities the court deems proper, to receive
evidence on and recommend the amount of the fair value of the shares. The court
shall determine whether the shareholder or
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<PAGE>
shareholders in question have fully complied with the requirements of this
section, and shall determine the fair value of the share, taking into account
any and all factors the court finds relevant, computed by any method or
combination of methods that the court, in its discretion, sees fit to use,
whether or not used by the corporation or by a dissenter. The fair value of the
shares as determined by the court is binding on all shareholders, wherever
located. A dissenter is entitled to judgment in cash for the amount by which the
fair value of shares as determined by the court, plus interest, exceeds the
amount, if any, remitted under subdivision 5, but shall not be liable to the
corporation for the amount, if any, by which the amount, if any, remitted to the
dissenter under subdivision 5 exceeds the fair value of the shares as determined
by the court, plus interest.
Subd. 8. COSTS, FEES; EXPENSES. (a) The court shall determine the costs
and expenses of a proceeding under subdivision 7, including the reasonable
expenses and compensation of any appraisers appointed by the court, and shall
assess those costs and expenses against the corporation, except that the court
may assess part or all of those costs and expenses against a dissenter whose
action in demanding payment under subdivision 6 is found to be arbitrary,
vexatious, or not in good faith.
(b) If the court finds that the corporation has failed to comply
substantially with this section, the court may assess all fees and expenses of
any experts or attorneys as the court deems equitable. These fees and expenses
may also be assessed against a person who has acted arbitrarily, vexatiously, or
not in good faith in bringing the proceeding, and may be awarded to a party
injured by those actions.
(c) The court may award, in its discretion, fees and expenses to an attorney
for the dissenters out of the amount awarded to the dissenters, if any.
Laws 1981, c. 270, Section 81, eff. July 1, 1981. Amended by laws 1987, c. 104,
SectionSection 30 to 33; Laws 1993, c. 17, SectionSection 41, 42.
534337
C-4
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Article Eleventh of the Registrant's Certificate of Incorporation provides
that directors of the corporation shall not be personally liable to the
Registrant or its stockholders for monetary damages for breach of fiduciary duty
as a director, except for liability (i) for any breach of the director's duty of
loyalty of the Registrant or its stockholders, (ii) for acts or omissions not in
good faith or which involve intentional misconduct or a knowing violation of
law, (iii) under Section 174 of the Delaware General Corporation Law (the
"Delaware GCL"), as the same exists or may be amended in the future, or (iv) for
any transaction from which the director derived an improper personal benefit. If
the Delaware GCL is amended to authorize the further elimination or limitation
of the liability provided in Article Eleventh, shall be limited to the fullest
extent permitted by the amended Delaware GCL. No amendment to or repeal of
Article Eleventh shall apply to or have an effect on the liability or alleged
liability of any director of the Registrant for or with respect to any acts or
omissions of such director occurring prior to such amendment or repeal.
Article VIII of the Registrant's Bylaws provides, in pertinent part, that
each person who is or was a director, officer, employee or agent of the
corporation, or is or was serving at the request of the corporation as a
director, officer, employee or agent of another corporation, partnership, joint
venture, trust, employee benefit plan or other enterprise, shall be indemnified
by the Registrant to the full extent permitted by the Delaware GCL or any other
applicable laws. Article VIII also provides that, upon receipt of an undertaking
by an indemnitee to repay such amounts should it ultimately be determined that
the indemnitee is not entitled to be indemnified, the Registrant shall advance
expenses incurred in defending or investigating a threatened or pending action,
suit or proceeding. Article VIII also authorizes the Registrant to enter into
one or more agreements with any person which provides for indemnification
greater or different than that provided for in Article VIII. Article VIII also
authorizes the Registrant to purchase and maintain insurance on behalf of any
person against such liability, whether or not the Registrant would have the
power or the obligation to indemnify such person.
The Registrant intends to enter into indemnification agreements with its
officers and directors in the form incorporated by reference as Exhibit 10.1 to
this Registration Statement.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted pursuant to the foregoing provisions to directors,
officers or persons controlling the Registrant, the Registrant has been informed
that, in the opinion of the Securities and Exchange Commission, such
indemnification is against public policy as expressed in said Act and is
therefore unenforceable.
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) Exhibits.
<TABLE>
<CAPTION>
EXHIBIT NO. EXHIBIT
- ------------- ----------------------------------------------------------------------------------------------
<C> <S>
2.1** Final Amended and Restated Agreement and Plan of Merger
3(i).1** Certificate of Incorporation of the Registrant
3(ii).1** Bylaws of the Registrant
4.1** Specimen Certificate evidencing shares of Registrant's Common Stock
5.1 Opinion of Manatt, Phelps & Phillips, LLP
8.1 Opinion of Manatt, Phelps & Phillips, LLP
10(i).1** Form of Indemnification Agreement -- Global One
10(ii).1** Form of Indemnification Agreement -- KRSI
10(iii).1** Form of Indemnification Agreement -- OSP
</TABLE>
II-1
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT NO. EXHIBIT
- ------------- ----------------------------------------------------------------------------------------------
<C> <S>
10.2** Form of Global One Distribution & Merchandising Inc. 1996 Stock Option Plan and forms of Stock
Option Agreements
10.3** Form of Employment Agreement for Joseph C. Angard
10.4** Form of Employment Agreement for Michael A. Malm
10.5** Agreement between Stanley DeSantis and OSP
10.6** Form of Employment Agreement for George J. Vrabeck
10.7** Loan and Security Agreement between Foothill Capital Corporation and OSP Publishing, Inc. and
The Button Exchange, Ltd.
10.8** Amended and Restated Promissory Note
10.9** Amended and Restated Stock Pledge and Escrow Agreement
10.10** Secured Promissory Note
10.11** Restated Secured Promissory Note and Security Agreement
10.12** Warrants to Purchase Common Stock of OSP Publishing, Inc.
10.13** Lease Agreement
10.14** Form of Stock Purchase and Registration Rights Agreement
10.15** Placement Agent Agreement between Registrant and Miller, Johnson & Kuehn, Incorporated
10.16** Form of Warrants to Purchase Common Stock of Global One Distribution & Merchandising Inc.
10.17** Financial Advisory Agreement between Registrant and Mark S. Hauser dated May 10, 1996
10.18** Financial Advisory Agreement between Registrant and Tamarix Capital Corporation dated July 25,
1995
10.19** Financial Advisory Agreement between Registrant and Tamarix Capital Corporation dated May 10,
1996
10.20 Resolutions of Global One Distribution & Merchandising Inc. Authorizing Assumption of Kelly
Russell Options
23.1 Consent of Deloitte & Touche LLP
23.2 Consent of McGladrey & Pullen, LLP
23.3 Consent of Manatt, Phelps & Phillips, LLP (included in Exhibit 5.1)
23.4 Consent of Manatt, Phelps & Phillips, LLP (included in Exhibit 8.1)
23.5 Consent of The Equisource Group
27** Financial Data Schedule
99.1** Form of Proxy
99.2** Consent of Mark S. Hauser
99.3** Consent of Thomas R. King
</TABLE>
- ------------------------
** Previously filed
(b) Financial Statement Schedules.
All OSP schedules are omitted because the required information is not
applicable or is included in the Financial Statements of OSP and the related
notes.
Schedule II to the financial statements of Kelly Russell and the independent
auditors thereon appears at II-4 of the Registration statement.
(c) The opinion of The Equisource Group is attached as Appendix B to the
Prospectus.
II-2
<PAGE>
ITEM 22. UNDERTAKINGS.
(a) The undersigned Registrant hereby undertakes:
(i) To file, during any period in which offers or sales are being made,
a post-effective amendment to this Registration Statement:
(A) To include any prospectus required by Section 10(a)(3) of the
Securities Act;
(B) To reflect in the prospectus any facts or events arising after
the effective date of the Registration Statement (or the most recent
post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set forth in
the Registration Statement. Notwithstanding the foregoing, any increase
or decrease in volume of securities offered (if the total dollar value of
securities offered would not exceed that which was registered) and any
deviation from the low or high end of the estimated maximum offering
range may be reflected in the form of prospectus filed with the
Commission pursuant to Rule 424(b) if, in the aggregate, the changes in
volume and price represent no more than a 20% change in the maximum
aggregate offering price set forth in the "Calculation of Registration
Fee" table in the effective registration statement;
(C) To include any material information with respect to the plan of
distribution not previously disclosed in the Registration Statement or
any material change to such information in the Registration Statement.
(ii) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be deemed
to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to
be the initial bona fide offering thereof.
(iii) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the
termination of the offering.
(iv) Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers and
controlling persons of the Registrant pursuant to the foregoing provisions,
or otherwise, the Registrant has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is against public
policy as expressed in the Act and is, therefore, unenforceable. In the
event that a claim for indemnification against such liabilities (other than
the payment by the Registrant of expenses incurred or paid by a director,
officer or controlling person of the Registrant in the successful defense of
any action, suit or proceeding) is asserted by such director, officer or
controlling person in connection with the securities being registered, the
Registrant will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against
public policy as expressed in the Act and will be governed by the final
adjudication of such issue.
(b) The undersigned Registrant hereby undertakes to respond to requests for
information that is incorporated by reference into the Proxy
Statement/Prospectus pursuant to Items 4, 10(b), 11, or 13 of this form, within
one business day of receipt of such request, and to send the incorporated
documents by first class mail or other equally prompt means. This includes
information contained in documents filed subsequent to the effective date of the
Registration Statement through the date of responding to the request.
(c) The undersigned Registrant hereby undertakes to supply by means of a
post-effective amendment all information concerning a transaction, and the
company being acquired involved therein, that was not the subject of and
included in the Registration Statement when it became effective.
II-3
<PAGE>
INDEPENDENT AUDITORS' REPORT
ON THE SUPPLEMENTARY INFORMATION
To the Board of Directors
Kelly Russell Studios, Inc.
Plymouth, Minnesota
Our audit of the financial statements of Kelly Russell Studios, Inc.
included schedule II contained herein for the years ended December 31, 1993,
1994 and 1995. In our opinion, such schedule presents fairly the information
required to be set forth therein, in conformity with generally accepted
accounting principles.
McGLADREY & PULLEN, LLP
Minneapolis, Minnesota
March 11, 1996
II-4
<PAGE>
SCHEDULE II
KELLY RUSSELL STUDIOS, INC.
VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995
<TABLE>
<CAPTION>
BALANCE AT CHARGED TO BALANCE AT
BEGINNING COST AND END OF
DESCRIPTION OF PERIOD EXPENSES DEDUCTIONS PERIOD
- ------------------------------------------------------- ------------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Deducted in the balance sheets from the assets to which
it applies:
Allowance for doubtful accounts:
Year ended December 31, 1993....................... $ 5,000 $ 15,000 $ -- $ 20,000
Year ended December 31, 1994....................... 20,000 156,000 -- 176,000
Year ended December 31, 1995....................... 176,000 52,000 177,000 51,000
Allowance for sales returns:
Year ended December 31, 1994....................... -- 384,000 -- 384,000
Year ended December 31, 1995....................... 384,000 100,000 374,000 110,000
Deferred tax asset valuation allowance:
Year ended December 31, 1993....................... -- 82,000 -- 82,000
Year ended December 31, 1994....................... 82,000 1,872,000 -- 1,954,000
Year ended December 31, 1995....................... 1,959,000 856,000 -- 2,815,000
</TABLE>
II-5
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
has duly caused this Amendment No. 2 to registration statement to be signed on
its behalf by the undersigned, thereunto duly authorized, in the City of Bell,
State of California, on July 29, 1996.
Global One Distribution & Merchandising Inc.
a Delaware corporation
By JOSEPH C. ANGARD
------------------------------------------
Joseph C. Angard,
CHAIRMAN OF THE BOARD
AND CHIEF EXECUTIVE OFFICER
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons in the
capacities and on the dates indicated.
SIGNATURE TITLE DATE
- ----------------------------------- ------------------------- ----------------
Chairman of the Board and
JOSEPH C. ANGARD Chief Executive Officer
- ----------------------------------- (Principal Executive July 29, 1996
Joseph C. Angard Officer), Director
Vice President and Chief
CHRISTOPHER B. LUCAS Financial Officer
- ----------------------------------- (Principal Financial July 29, 1996
Christopher B. Lucas Officer and Accounting
Officer)
MICHAEL A. MALM
- ----------------------------------- Director July 29, 1996
Michael A. Malm
S-1
<PAGE>
[LETTERHEAD]
July 29, 1996
Global One Distribution & Merchandising, Inc.
5548 Lindbergh Lane
Bell, California 90201-6410
Gentlemen:
We have acted as counsel for Global One Distribution & Merchandising Inc.,
a Delaware corporation, (the "Company"), in connection with the proposed
issuance by the Company of up to 2,645,766 shares of the Company's Common Stock,
$.01 par value per share (the "Common Stock") by means of that certain
Registration Statement on Form S-4 (Registration No. 333-4655), as amended and
supplemented.
We have examined such documents, records and matters of law as we have
deemed necessary for purposes of this opinion. We have also obtained from
officers of the Company such advice as we considered necessary for the purposes
of this opinion and insofar as our opinion is based on matters of fact upon
which conclusions of law are expressed, we have relied upon such advice.
Based upon the foregoing, we are of the opinion that:
1. The Company is duly incorporated, validly existing and in good
standing under the laws of the State of Delaware.
2. The Common Stock has been duly authorized, and when issued and
delivered pursuant to the terms of that certain Amended and Restated Agreement
and Plan of Reorganization dated May 28, 1996 effective as of March 27, 1996,
will be validly issued, fully paid and nonassessable.
We hereby consent to the filing of this opinion as an exhibit to the
Registration Statement on Form S-4 which is being filed on behalf of the Company
in connection with the registration of the aforementioned shares of Common Stock
under the Securities Act of 1933, as amended, and to the reference to this firm
under the heading "Legal Matters" and in the prospectus comprising a part of
such Registration Statement and any amendments thereto.
Very truly yours,
/s/ MANATT, PHELPS & PHILLIPS, LLP
<PAGE>
[LETTERHEAD]
July 29, 1996
File No: 8273-035
Board of Directors
Global One Distribution & Merchandising Inc.
5548 Lindbergh Lane
Bell, California 90201-6410
Board of Directors
Kelly Russell Studios, Inc.
2905 Northwest Boulevard, Suite 220
Plymouth, Minnesota 55441
RE: CERTAIN FEDERAL INCOME TAX CONSEQUENCES
OF THE MERGER OF KELLY RUSSELL STUDIOS, INC.,
WITH AND INTO KRSI ACQUISITION CORP.
---------------------------------------------
Ladies and Gentlemen:
In accordance with your request, we provide the following analysis
and opinions relating to certain federal income tax consequences of the
transaction (the "Merger") whereby Kelly Russell Studios, Inc. ("KRSI"), will
merge with and into KRSI Acquisition Corp. ("KRSI Acquisition") pursuant to
that certain Final Amended and Restated Agreement and Plan of Reorganization
dated May 28, 1996 (the "Agreement"). Terms used herein have the same
meanings as in the Agreement.
In the Merger, KRSI shall be merged with and into KRSI Acquisition,
a wholly-owned subsidiary of Global One Distribution & Merchandising Inc.
("Global One"). The separate corporate existence of KRSI shall cease. KRSI
Acquisition shall continue as the surviving corporation and shall continue to
be a wholly-owned subsidiary of Global One. Subject to dissenters' rights,
each share of KRSI stock issued and outstanding shall be converted into
Global One stock. No fractional shares of Global One stock shall be issued
in the Merger; fractional shares shall be rounded up into a whole share of
Global One stock in the exchange. From and after the Effective Time, KRSI
Acquisition shall possess all the rights, privileges, powers and franchises
and be subject to all of the restrictions, disabilities and duties of KRSI
and KRSI Acquisition.
<PAGE>
Board of Directors
July 29, 1996
Page 2
Our analysis and the opinions set forth herein are based upon the
facts as set forth in the Agreement referred to above, including the exhibits
thereto. Our opinions are also based upon the facts set forth in that
certain Form S-4 filed by Global One with the Securities and Exchange
Commission on May 29, 1996 and as later amended (the "Form S-4"). Our opinions
are also based upon the facts set forth in certain written representations to
us from Global One, KRSI and certain shareholders of KRSI in letters on or
about this date. The facts contained in the above-referenced documents are
incorporated herein by reference as the operative facts underlying the tax
opinions set forth herein. One of our key assumptions for purposes of this
letter is that the facts set forth in those documents are accurate now and at
consummation of the Merger and are otherwise true, complete and correct. Any
change or inaccuracy in such facts may adversely affect our opinions.
We have acted as special counsel to Global One in connection with
the Merger and are rendering these opinions at its request. In rendering
these opinions, we have examined such documents, laws, regulations and other
legal matters as we have considered necessary or appropriate for purposes of
the opinions expressed herein. We have not made any independent
investigation in rendering these opinions other than as described herein, nor
have we been requested to do so.
Our opinions are based upon the Internal Revenue Code of 1986, as
amended (the "Code"), as of the date hereof and currently applicable Treasury
Regulations promulgated under the Code (including proposed Treasury
Regulations), published administrative positions of the Internal Revenue
Service ("IRS") in revenue rulings and revenue procedures, and judicial
decisions. Such legal authorities are all subject to change, either
prospectively or retroactively. No assurance can be provided as to the
effect of any such change upon our opinions.
The opinions set forth herein have no binding effect on the IRS or
the courts. No assurance can be given that, if contested, a court would
agree with the opinions set forth herein. The opinions set forth herein
represent rather our best legal judgment as to the likely outcome of the
issues addressed herein if such issues were litigated.
In the case of transactions as complex as the Merger, many federal,
state, local and foreign income and other tax consequences may arise. We
have been asked only to address the issues specifically set forth below
concerning the Merger. No opinion is expressed regarding any other issues.
We note that, as described in the Form S-4 previously referred to, other
transactions will occur at or about the same time as the Merger. We have not
been asked to render any opinions regarding the tax consequences of such
other transactions and we offer no such opinions.
This letter is being issued solely for the benefit of Global One,
KRSI and their respective shareholders. It may not be relied upon by any other
person without our prior written consent.
<PAGE>
Board of Directors
July 29, 1996
Page 3
Subject to the foregoing, our opinions regarding the Merger are as
follows:
Holders of KRSI Common Stock who receive Global One Common Stock in
exchange for their KRSI Common Stock in the Merger will not recognize gain or
loss as a result of receipt of such Global One Common Stock. Assuming such
shareholders hold their KRSI Common Stock as capital assets, such
shareholders will tack their holding periods for the KRSI Common Stock in
computing their holding periods for the Global One Common Stock received in
the Merger. The KRSI shareholders will take a substituted basis for their
Global One Common Stock received in the Merger computed by reference to the
basis for their KRSI Common Stock. Pursuant to Section 361(a) of the Code,
KRSI will not recognize gain or loss in the Merger as a result of the transfer
of its Assets to KRSI Acquisition. Neither Global One nor KRSI Acquisition
will recognize gain or loss as a result of the transfer of Global One Common
Stock to the KRSI shareholders.
We hereby consent to the inclusion of this letter as an exhibit
to the Form S-4 and to the reference to our name in the Form S-4.
Very truly yours,
/s/ MANATT, PHELPS & PHILLIPS, LLP
Manatt, Phelps & Phillips, LLP
<PAGE>
Resolutions of the Board of Directors of
Global One Distribution and Merchandising Inc.
Assumption of KRSI Stock Options
WHEREAS, Global One Distribution and Merchandising Inc. (the "Company")
has entered into that certain Final Amended and Restated Agreement and Plan
of Reorganization dated May 24, 1996, effective as of March 27, 1996 (the
"Agreement"), with Kelly Russell Studios, Inc. ("KRSI") and certain other
parties;
WHEREAS, in accordance with the terms of the Agreement, the Company will
become the holding company for KRSI through a series of merger transactions,
and KRSI shareholders will receive shares of the Company's common stock, par
value $.01 per share ("Company Common Stock");
WHEREAS, in connection with these transactions, the Board of Directors
of the Company has determined that it is in the Company's best interests to
assume all KRSI stock options outstanding as of the date that such
transactions as consummated (the "Effective Time");
NOW, THEREFORE, BE IT HEREBY RESOLVED, that the Company shall assume all
KRSI stock options outstanding as of the Effective Time;
FURTHER, RESOLVED, that shares of Company Common Stock shall be issued
to holders of KRSI options upon such holders' proper exercise of such options
in accordance with the terms and conditions of the holders' KRSI stock option
agreements, with appropriate adjustments to be made in the amount of shares
to be issued and the exercise prices therefor as of the time of exercise to
reflect the Exchange Ratio, as such term is defined in Section 1.22 of the
Agreement;
FURTHER RESOLVED, that up to 603,970 shares of Company Common Stock be
reserved for issuance to KRSI option holders hereunder;
FURTHER RESOLVED, that the officers of the Company be, and they hereby
are, authorized and directed to take such other actions as they deem
necessary or appropriate to carry out the intent of the foregoing
resolutions, including negotiating and executing agreements with each of the
KRSI optionees for the assumption of options hereby authorized.
<PAGE>
EXHIBIT 23.1
INDEPENDENT AUDITORS' CONSENT
We consent to the use in this Amendment No. 2 to Registration Statement No.
333-4655 of Global One Distribution & Merchandising Inc. on Form S-4 of our
report dated April 5, 1996 (May 24, 1996 as to Note 14) appearing in the
Prospectus, which is a part of this Registration Statement, and to the
references to us under the headings "Selected Financial Data" and "Experts" in
such Prospectus.
DELOITTE & TOUCHE LLP
Long Beach, California
July 30, 1996
<PAGE>
EXHIBIT 23.2
CONSENT OF INDEPENDENT AUDITORS
We hereby consent to use in this Registration Statement on Form S-4 our
report dated March 11, 1996 relating to the financial statements of Kelly
Russell Studios, Inc. (Kelly Russell) as of December 31, 1994 and 1995 and for
each of the three years in the period ended December 31, 1995 (which report
contained an explanatory paragraph discussing Kelly Russell's ability to
continue as a going concern), and to the references to our Firm under the
captions "Selected Financial Data" and "Experts" (as it relates to the financial
statements of Kelly Russell) in the Prospectus.
McGLADREY & PULLEN, LLP
Minneapolis, Minnesota
July 30, 1996
<PAGE>
EXHIBIT 23.5
CONSENT OF THE EQUISOURCE GROUP
We hereby consent to inclusion of our opinion as Appendix C to the Proxy
Statement/Prospectus of Kelly Russell Studios, Inc. and Amendment No. 2 to
Registration Statement No. 333-4655 of Global One Distribution & Merchandising
Inc., and further consent to reference therein to such opinion under the
headings "The KRSI Merger, the Reorganization and the Private Placement -- Kelly
Russell's Financial Advisor" and "Summary" and in the Kelly Russell Studios,
Inc. letter to shareholders regarding the proposed Merger. In giving such
consent, we do not admit that we come within the category of persons whose
consent is required under Section 7 of the Securities Act of 1933 and the rules
and regulations thereunder.
THE EQUISOURCE GROUP
Houston, Texas
July 29, 1996
